Definition and Characteristics of Public Limited Company

Definition and Characteristics of Public Limited Company

Introduction:

“Company” refers to a voluntary association of individuals formed for the purpose of attaining a common social or economic end. “Company” as such has no specific legal meaning. A Public Limited Company is an association of voluntary members that incorporated, has separate legal existence and where the liability of members is limited. Public Limited Company is same as Private Limited Company in Many ways.

In Section 3(1)(i) of the Companies Act, 1956, Company is defined as “A company formed and registered under this Act or an existing company.” In Section 3(1)(ii) of the same Act says that “An existing company means a formed and registered under the any of the previous companies law.”

According to USA Chief Justice Marshall, “A company is a person, artificial, invisible, intangible, and existing only in the contemplation of the law. Being a mere creation of law, it possesses only those properties which the character of its creation of its creation confers upon it either expressly or as incidental to its very existence”.

Definition of Company according to Yale Law Journal: “A Company is an intricate, centralized, economic, administrative structure run by professional managers who hire capital from the investors.”

Public Limited Companies are listed on basis of stock exchange where it’s shares are traded publicly.

Features of Public Limited Company:

• Separate Legal Entity:
  A Public Company is a legal entity that has separate identity from its members.
• Easy Transferability:
  It says that a shareholder can easily transfer its shares to public and to which there are no restrictions. This is a statutory right. This right cannot be taken away by a provision in the articles. However, these articles prescribe the manner in which transfer of shares will be made and it can also contain bona fide and reasonable restrictions on the rights of members for transferring their shares. In order to make this right more effective the shareholder may apply to the Central Government if any refusal by the company to register the transfer.
• Perpetual Succession:
  This says that the shareholders/members may come and go but the company never becomes non-existence, till the company is not closed. A company has a perpetual succession, irrespective of changes in its members.
• Limited Liability:
  The shareholders are not liable personally in case of losses of the company. For Example, if face value of a share is Rs. 100 and a member has already paid Rs. 70 per share, he can be called upon to pay not more than Rs. 30per share during the lifetime of the company. The liability of members is limited to such amount as the member may undertake to contribute to the assets of the company in the events of its being wound up in a company limited guarantee.
• Paid- Up- Capital:
  Minimum Paid up Capital required to start its operation as a public company are Rs 15,00,000. (As per Companies Act, 2013)
• Name:
  In the name of any Public Company, “LTD” will be prefixed at the end of the name of company.
• Directors:
  Number of Directors can be Minimum 3 and Maximum can be as many in Public Company.
• Prospectus:
  It is the statement comprising the detail information and the number of shares invited by the company in particular IPO. Unlike a public company a private company does not have to issue a prospectus with the Registrar before allotting shares.
• Borrowing Capacity:
  A Public Company can borrow from various sources and that’s the most attraction point for members.
• Number of Members:
  Minimum 7 members and there no limit for maximum.
• Board of Directors:
  Elected by shareholders in the Annual General Meeting. Minimum number of Board of Directors is 3 and Maximum 12. In case of Public company the directors have to file consent with the register consent to act a director. A private company is not expected to do this.
• Voluntary Associate:
  It’s easy to buy shares and exit the Public Company.
• Minimum Subscription:
  Minimum Amount to be received on the subscription of shares has to be 90% of the shares in the Public Company.
• Certificate of Commencement:
  In Public Company, the Certificate of Incorporation as well as Certificate of commencement is both required. A Private company may commence business immediately after receiving a certificate of Commencement.
• Memorandum of Association:
  Memorandum of Association is a major document in the formation.

In Section 2(56) of Companies Act, 2013, Memorandum is defined as, it states the main objective of the companies that is, the main businesses which the company is going to undertake.

Advantages of Public Companies:

• Ability to raise funds by selling stock:
  Advantage of public companies is that it has the ability to raise funds through the sale of the company’s stock to the public. Public Companies can also raise funds in primary market and secondary market by allowing public to invest to purchase shares of the company. It is difficult to obtain large amounts of capital, other than through borrowing, to finance operations before becoming a public company. It can raise large amounts of capital in public exchanges to carry out capital-intensive activities. Here the shareholders benefit from capital gains of stock and from dividend payments.
• Availability of financial information:
  This makes the company it easier for analysts to calculate the valuation of the company. Public companies have to file quarterly and annual financial statements as well as other mandatory documents with the SEC. The public companies have been motivated to meet the disclosure requirements for disseminating information about their financial performance and for the current shareholders and potential investors.

Disadvantages of Public Companies:

• Increased government and regulatory scrutiny:
  Public companies are vulnerable to increase scrutiny from the government, public and regulatory agencies. These companies have to meet various mandatory reporting standards set by the government entities like SEC and the IRS.
• Strict adherence to global accounting standards:
  Public companies have to prepare the financial reports in accordance with the GAAP (Generally Accepted Accounting Principles) or IFRS (International Financial Reporting Standards). Members or the shareholders are entitled to key documents on the business of the public company.

Author: Neha Ghuge,
Government Law College, Mumbai/Second Year