Law and You > Corporate Laws > Companies Act, 2013 > Public Companies under Companies Act, 2013

The concept of a Public Limited Company plays a crucial role in the framework of corporate law and governance in India. Under the Companies Act, 2013, a public company is defined not only by its structure but also by its ability to raise capital from the public and operate with a higher level of transparency and accountability. These companies are pivotal to economic development as they attract investments, create employment, and contribute significantly to national income. With the Companies (Amendment) Act, 2023, several compliance norms and governance standards were further strengthened to enhance corporate responsibility and investor protection. This article explores the legal definition, characteristics, incorporation process, compliance requirements, and the practical implications of operating as a public company under the Indian corporate regime.

Defining a Private Company:

Section 2 (68) of Company Act, 2013:

“private company” means a company having a minimum paid-up share capital of one lakh rupees or such higher paid-up share capital as may be prescribed, and which by its articles,—

(i) restricts the right to transfer its shares;

(ii) except in case of One Person Company, limits the number of its members to two hundred:

Provided that where two or more persons hold one or more shares in a company jointly, they shall, for the purposes of this clause, be treated as a single member:

Provided further that—

(A) persons who are in the employment of the company; and

(B) persons who, having been formerly in the employment of the company,

were members of the company while in that employment and have continued to be members after the employment ceased, shall not be included in the number of members; and

(iii) prohibits any invitation to the public to subscribe for any securities of the company;

Section 2(68) of Companies Act, 2013 defines private companies. According to that, private companies are those companies whose articles of association restrict the transferability of shares and prevent the public at large from subscribing to them. This restriction is the basic criterion that differentiates private companies from public companies. From this Section of the Company Act we can obtain following characteristics.

Defining a Public Company:

Section 2(71) of the Companies Act 2013:

 “public company” means a company which—

(a) is not a private company; and

(b) has a minimum paid-up share capital as may be prescribed:

Provided that a company which is a subsidiary of a company, not being a private company, shall be deemed to be public company for the purposes of this Act even where such subsidiary company continues to be a private company in its articles;

Thus a Public Company is a company which:

• Is not a Private Company.
• Has a minimum paid-up share capital as may be prescribed (currently ₹5 lakh, though the requirement has been relaxed practically).
• May offer its securities to the public.

Note that, if a private company is a subsidiary of a public company, it is also treated as a public company for the purposes of the Act.

Examples:

• Reliance Industries Limited
• Tata Steel Limited
• Larsen and Toubro Limited

Characteristics of the Private Limited Company:

Limitation on Membership:

Public companies can have a minimum 7 members and there is no restriction on maximum number of members.

Paid-Up Capital:

This definition had previously prescribed a minimum paid-up share capital of Rs. 5 lakh for public companies, but an amendment in 2015 removed this requirement. Public companies can now have a minimum paid-up capital of any amount.

Transferability of Shares: 

In a public company, the shares are freely transferable. Shares are available for purchase by the general public on stock exchanges, making ownership widely distributed among investors.

Name of Company:

A public company must include the words “Public Limited” or simply “Limited” in their names.

Limited Liability:

The liability of each member or shareholders is limited to the amount of shares he holds. He will not be required to pay more than the extent of the face value of share he holds. It means that if a company faces loss under any circumstances then its shareholders are liable to sell their own assets for payment. The personal, individual assets of the shareholders are not at risk.

Perpetual Succession:

A company hold ‘perpetual succession’ which means continuity or uninterrupted existence until it is dissolved legally. Thus the life of the company keeps on existing forever. The company keeps on existing in the eyes of law even in the case of death, insolvency, the bankruptcy of any of its members or change in the membership.

Separate Legal Entity:

Unlike sole proprietorship and partnership a company enjoys separate legal entity wherein even if the shareholders, directors or members of a company die, the company still continues to stay in existence. It can be taken over by other people who can then continue to run the business. Overall the company has the legal capacity to own property and also incur debts. The members and the shareholders of the company are free from the liability to the creditors for such debts.

Number of Directors:

A public company must have at least 3 directors and maximum 15. In the case of a public company, the directors must file with the Register a consent to act as directors or sign an undertaking for their qualification shares. At least 1 director must be resident in India (i.e. he stays more than 182 days in a financial year in India)

Index of Members:

A public company have to keep an index of its members.

Legal Formalities:

The legal formalities in the formation of public limited companies are more compared to the formation of private limited companies.

Prospectus:

Prospectus is a detailed statement of the company affairs which is issued by a company for its public. The Company Act, 2013 requires to issue a prospectus when raising a finance from the public and hence the stringent provisions of the Act related to the issue of prospectus are applicable to public companies.

Raising Fund:

Public companies have the advantage of being able to raise capital from the public through the issuance of shares, raising deposits and thus enabling them to tap into a wider pool of investors.

Minimum Subscription:

It is the amount received by the company which is 90% of the shares issued within a certain period of time. If the company is not able to receive 90% of the amount then they cannot commence further business.

Regulatory Compliance:

Public companies are mandated by law to have at least two independent directors on their board if they meet certain financial criteria. Additionally, they are required to constitute an audit committee and a nomination and remuneration committee. Public companies are subject to more stringent regulations concerning corporate governance, transparency and accountability due to their widespread ownership structure. Compliance with these regulations is not only a legal requirement but also enhances the credibility and trustworthiness of the company in the eyes of investors and the public.

Appointment of Key Managerial Personnel:

Public companies with a paid-up share capital of Rs. 10 crores or more are obligated to appoint key managerial personnel, emphasising the need for specialised roles in larger, publicly traded entities.

Rotation of Directors

According to regulations, two-thirds of the total number of directors in a public company are liable to be retired by rotation every year. This mechanism ensures a periodic refreshment of the board, bringing in new perspectives and preventing stagnation in the decision-making process.

Limitations on Remunerations:

Public companies are subject to regulations limiting the overall remuneration paid to these roles to 11% of the net profits of the company in a particular financial year. This restriction aims to ensure fairness and prevent excessive remuneration in publicly accountable entities

Advantages of Public Company:

• Access to Capital: A public company can raise capital by issuing shares to the public through IPOs (Initial Public Offerings) and FPOs (Follow-on Public Offers). It has easier access to large-scale funding compared to private companies.
• Limited Liability: Shareholders’ liability is limited to the amount unpaid on their shares. Personal assets of members are protected from business debts.
• Transferability of Shares: Shares are freely transferable, which provides liquidity to shareholders. It attracts more investors who prefer flexible entry and exit options.
• Increased Credibility and Trust: Public companies are subject to greater transparency and statutory audits. Regular disclosure of financials and compliance builds investor confidence and market reputation.
• Listing on Stock Exchange: If listed, the company’s shares can be traded on platforms like NSE or BSE, providing visibility and access to a wider investor base. Share prices provide a real-time valuation of the company.
• Perpetual Succession: The company continues to exist regardless of changes in ownership or death of shareholders or directors. It ensures continuity of business operations.
• Diversification of Risk: Risk is shared among a large number of shareholders, reducing individual burden. It is ideal for large-scale businesses where capital needs are high.
• Better Employee Attraction and Retention: Public companies can offer Employee Stock Option Plans (ESOPs). It helps attract skilled employees and align their interest with company performance.
• Expansion and Growth Opportunities:  It is easier to secure bank loans, foreign investments, and strategic partnerships. Access to public funds supports geographic and product expansion.

Disadvantages of Public Company:

• Extensive Regulatory Compliance: Public companies must comply with numerous provisions under Companies Act, 2013, SEBI regulations (if listed) and Listing obligations. Regular filings, audits, disclosures, and meetings increase administrative burden.
• Loss of Control: As shares are available to the public, ownership becomes diluted. Founders or promoters may lose majority control over time, especially after public offerings.
• High Cost of Formation and Operations: Incorporating and maintaining a public company is costly due to legal and regulatory fees, cost of audits, compliance, public disclosures and costs related to issuing and listing shares
• Lack of Confidentiality: Public companies must publish financial statements, board reports and material business decisions, etc. Thus business strategies and financial data become public, which may benefit competitors.
• Pressure from Shareholders and Market: Management decisions are often influenced by the need to satisfy investors and show short-term profits. There is vulnerability to market volatility and shareholder activism.
• Risk of Hostile Takeovers: Since shares are freely traded, there is a risk that another entity can acquire a controlling stake without board approval.
• Time-Consuming Decision-Making: Important decisions may require shareholder approval via general meetings, delaying the process.
• Stricter Corporate Governance: Mandatory board committees (Audit, Nomination & Remuneration, etc.) and independent directors increase oversight and complexity.

Conclusion:

Public companies, as governed by the Companies Act, 2013, form the backbone of India’s corporate and capital market landscape. With their ability to raise capital from the public, enjoy perpetual succession, and offer shares freely, they are well-suited for large-scale operations and long-term growth. However, this comes with increased responsibility in the form of strict regulatory compliance, public transparency, and corporate governance standards.

Understanding the structure, incorporation process, advantages, and challenges of public companies is essential for entrepreneurs, investors, and professionals navigating the corporate world. As India continues to reform and modernize its corporate laws, public companies are expected to play an increasingly vital role in economic development, job creation, and global competitiveness.