| Types of Companies | | | | |
| 1. Public Company means a company which is not a | | | | |
| private company. | | | | |
| 2. Private Company means a company which by its | | | | |
| articles of association:-a. Restricts the right of | | | | |
| members to transfer its sharesb. Limits the number | | | | |
| of its members to fifty. In determining this number | | | | |
| of 50, employee-members and ex-employee | | | | |
| members are not to be considered.c. Prohibits an | | | | |
| invitation to the public to subscribe to any shares in | | | | |
| or the debentures of the company. | | | | Public and Private Company: Differences |
| If a private company contravenes any of the | | | | The main differences between Public or Private |
| aforesaid three provisions, it ceases to be private | | | | companies relate to the provisions of the Companies |
| company and loses all the exemptions and privileges | | | | Act that are not applicable to private companies. |
| which a private company is entitled. | | | | These include: |
| | | | | - Provisions as to the type of share capital, further |
| 3. Companies deemed to be public limited company: | | | | issue of share capital, voting rights, issue of shares |
| A private company will be treated as a deemed | | | | with disproportionate rights, etc. |
| public limited company in any of the following | | | | - Provisions restricting the company from giving |
| circumstances :- | | | | financial assistance to subscribe to its own shares. |
| 1. Where at least 25% of the paid up share capital | | | | - Provisions restricting the amount of managerial |
| of a private company is held by one or more bodies | | | | remuneration paid and certain other provisions relating |
| corporate, the private company shall automatically | | | | to managerial personnel. |
| become the public company on and from the date on | | | | - Provisions restricting the powers of the Board of |
| which the aforesaid percentage is so held. | | | | Directors. |
| | | | | - Provisions restricting loans to directors. |
| 2. Where the annual average turnover of the | | | | - Private companies are deemed to be converted |
| private company during the period of three | | | | into public companies in the following circumstances: |
| consecutive financial years is not less than Rs 25 | | | | --- When not less than 25% of the paid up capital of |
| crores, the private company shall be, irrespective of | | | | the company is held by one or more corporate |
| its paid up share capital, become a deemed public | | | | bodies. |
| company. | | | | --- When the company holds 25% of the paid up |
| | | | | share capital of a public company. |
| | | | | --- When the average annual turnover of the |
| 3. Where not less than 25% of the paid up capital | | | | company exceeds Rs.100 million. --- When the |
| of a public company limited is held by the private | | | | company accepts deposits from the public. |
| company, then the private company shall become a | | | | - On becoming a deemed public company, many |
| public company on and from the date on which the | | | | provisions of the Companies Act, 1956 in respect of |
| aforesaid percentage is so held. | | | | which the company had exemption as a private |
| | | | | company would become applicable. |
| 4. Where a private company accepts deposits after | | | | Private companies are formed between 2 to 50 |
| the invitation is made by advertisement or renews | | | | members and it prohibits invitation to public for capital |
| deposits from the public (other than from its | | | | issues. Many provisions of the Companies Act are not |
| members or directors or their relatives), such | | | | applicable. Also, there is a restriction on transfer of |
| companies shall become public company on and from | | | | shares and the taxation rates are higher. Shares of |
| date such acceptance or renewal is first made. | | | | the Public Limited Companies on the other hand, are |
| | | | | normally freely transferable. Minimum seven members |
| | | | | are required to form the company. The taxation |
| 4.Limited and Unlimited companies: | | | | rates are normally lower and there is a wider |
| Companies may be limited or unlimited companies. | | | | coverage of Companies Act. |
| Company may be limited by shares or limited by | | | | |
| guarantee.a. Company limited by shares In this case, | | | | |
| the liability of members is limited to the amount of | | | | |
| uncalled share capital. No member of company limited | | | | |
| by the shares can be called upon to pay more than | | | | |
| the face value of shares or so much of it as is | | | | |
| remaining unpaid. Members have no liability in case of | | | | |
| fully paid up shares.b. Company limited by the | | | | |
| guarantee A company limited by guarantee is a | | | | Establishing New Ventures - Company Formation - |
| registered company having the liability of its members | | | | Public and Private Company |
| limited by its memorandum of association to such | | | | |
| amount as the members may respectively thereby | | | | |
| undertake to pay if necessary on liquidation of the | | | | Incorporating a Company |
| company. The liability of the members to pay the | | | | Approval of Name: |
| guaranteed amount arises only when the company | | | | The first step in the formation of a company is the |
| has gone into liquidation and not when it is a going | | | | approval of the name by the Registrar of Companies |
| concern. A guarantee company may be a company | | | | (ROC) in the State/Union Territory in which the |
| with share capital or without share capital. | | | | company will maintain its Registered office. This |
| | | | | approval is provided subject to certain conditions: for |
| Unlimited Company: The liability of members of an | | | | instance, there should not be an existing company by |
| unlimited company is unlimited. Therefore their liability | | | | the same name. Further, the last words in the name |
| is similar to that of the liability of the partners of a | | | | are required to be "Private Ltd." in the case of a |
| partnership firm. | | | | private company and "Limited" in the case of a Public |
| | | | | Company. |
| 5.Section 25 Companies: Under the Companies Act, | | | | Memorandum and Articles, etc. |
| 1956, the name of a public limited company must end | | | | The memorandum of Association and Articles of |
| with the word 'Limited' and the name of a private | | | | Association are the most important document to be |
| limited company must end with the word 'Private | | | | submitted to the ROC for the purpose of |
| Limited'. However, under Section 25, the Central | | | | incorporation of a company. The Memorandum of |
| Government may allow comapnies to remove the | | | | Association is a document that sets out the |
| word "Limited / Private Limited" from the name if the | | | | constitution of the company. It contains, amongst |
| following conditions are satisfied :- | | | | others, the objects and the scope of activity of the |
| 1. The company is formed for promoting | | | | company and also defines the relationship of the |
| commerce, science, art, religion, charity or other | | | | company with the outside world. |
| socially useful objects | | | | The Articles of Association contain the rules and |
| 2. The company does not intend to pay dividend to | | | | regulations of the company for the management of |
| its members but apply its profits and other income in | | | | its internal affairs. While the Memorandum specifies |
| promotion of its objects. | | | | the objects and purposes for which the Company |
| | | | | has been formed, the Articles lay down the rules and |
| 6.Holding and Subsidiary companies | | | | regulations for achieving those objects and purposes. |
| A company shall be deemed to be subsidiary of | | | | The ROC will give the certificate of incorporation |
| another company if :- | | | | after the required documents are presented along |
| 1. That other company controls the composition of | | | | with the requisite registration fee, which is scaled |
| its board of directors ; or | | | | according to the share capital of the company, as |
| 2. That other company holds more than half in face | | | | stated in its Memorandum. A private company can |
| value of its equity share capital | | | | commence business on receipt of its certificate of |
| 3. Where the first mentioned company is subsidiary | | | | incorporation. |
| company of any company which that other's | | | | A public company has the option of inviting the public |
| subsidiary. eg Company B is subsidiary of the | | | | for subscription to its share capital. Accordingly, the |
| Company A and Company C is subsidiary of | | | | company has to issue a prospectus, which provides |
| Company B, therefore Company C is subsidiary of | | | | information about the company to potential investors. |
| Company A. | | | | The Companies Act specifies the information to be |
| The control of the composition of the Board of | | | | contained in the prospectus. |
| Directors of the company means that the holding | | | | The prospectus has to be filed with the ROC before |
| company has the power at its discretion to appoint | | | | it can be issued to the public. In case the company |
| or remove all or majority of directors of the | | | | decides not to approach the public for the necessary |
| subsidiary company without consent or concurrence | | | | capital and obtains it privately, it can file a "Statement |
| of any other person. | | | | in Lieu of Prospectus" with the ROC. |
| | | | | On fulfilment of these requirements, the ROC issues |
| 7.Government Companies | | | | a Certificate of Commencement of Business to the |
| Means any company in which not less than 51% of | | | | public company. The company can commence |
| the paid up share capital is held by the Central | | | | business immediately after it receives this certificate. |
| Government or any State Government or partly by | | | | |
| the Central Government and partly by the one or | | | | Winding Up |
| more State Governments and includes a company | | | | The Companies Act lays down the provisions and the |
| which is a subsidiary of a government company. | | | | procedures for winding up operations leading to the |
| Government Companies are also governed by the | | | | dissolution of the company. Winding up may be either |
| provisions of the Companies Act. However, the | | | | through court or voluntarily by the members of the |
| Central Government may direct that certain | | | | company. |
| provisions of the Companies Act shall not apply or | | | | Before a company can initiate such proceedings |
| shall apply only with such exceptions, modifications | | | | under the Companies Act, it must seek clearance |
| and adaptions as may be specified to such | | | | from the government for closure of the unit and |
| government companies. | | | | displacement of labour under the Industrial Disputes |
| | | | | Act. |
| | | | | A sick or a potentially sick company that has been |
| 8. Foreign Companies | | | | referred to the Board of Financial and Industrial |
| Means a company incorporated in a country outside | | | | Reconstruction may be wound up pursuant to an |
| India under the law of that other country and has | | | | order passed by the Board. If a company wishes to |
| established the place of business in India. | | | | close down a manufacturing unit without dissolving |
| | | | | itself, it requires clearance from the government |
| | | | | under the Industrial Disputes Act. |
| Private company | | | | For final settlement to members of the Company |
| | | | | Board, prior permission of RBI is required. This |
| | | | | permission is to be taken once the final amount for |
| Private Company means a company which by its | | | | payment has been ascertained. |
| articles of association :-d. Restricts the right of | | | | |
| members to transfer its sharese. Limits the number | | | | |
| of its members to fifty. In determining this number | | | | |
| of 50, employee-members and ex-employee | | | | |
| members are not to be considered.f. Prohibits an | | | | |
| invitation to the public to subscribe to any shares in | | | | Valuation of Private vs. Public Firms |
| or the debentures of the company. | | | | |
| | | | | There are a number of factors that are considered |
| If a private company contravenes any of the | | | | differently in the valuation of privately held vs. public |
| aforesaid three provisions, it ceases to be private | | | | companies-even those that are in the same |
| company and loses all the exemptions and privileges | | | | industry-making a direct comparison for valuation |
| which a private company is entitled. | | | | purposes difficult. Following is a list of some of the |
| | | | | issues that may result in differences between the |
| If a private company contravenes any of the | | | | valuations of public and private firms: |
| aforesaid three provisions, it ceases to be private | | | | |
| company and loses all the exemptions and privileges | | | | 1. Market liquidity. A lack of market liquidity is usually |
| which a private company is entitled. | | | | the biggest factor contributing to a discount in the |
| | | | | value of companies. With public companies, we can, if |
| | | | | we choose, switch our investment to the stock of a |
| | | | | different public company on a daily (if not more |
| Following are some of the privileges and exemptions | | | | frequent) basis. The stock of privately held firms, |
| of a private limited company:- | | | | however, is more difficult to sell quickly, making the |
| 1. Mimimum number is members is 2 (7 in case of | | | | value drop accordingly. |
| public companies) | | | | |
| | | | | 2. Profit measurement. While private companies seek |
| 2. Prohibition of allotment of the shares or | | | | mostly to minimize taxes, public companies seek to |
| debentures in certain cases unless statement in lieu | | | | maximize earnings for shareholder reporting purposes. |
| of prospectus has been delivered to the Registrar of | | | | Therefore, the profitability of a private firm may |
| Companies does not apply. | | | | require restatement in order for it to be directly |
| | | | | comparable to that of a public firm. In addition, |
| 3. Restriction contained in Section 81 related to the | | | | public-company multiples are generally calculated from |
| rights issues of share capital does not apply. A special | | | | net income (after taxes), while private-company |
| resolution to issue shares to non-members is not | | | | multiples are often based on pre-tax (and many |
| required in case of a private company. | | | | times, pre-debt) income. This discrepancy can result in |
| | | | | an inaccurate formula for the valuation of a private |
| | | | | company. |
| 4. Restriction contained in Section 149 on | | | | |
| commencement of business by a company does not | | | | 3. Capitalization/capital structure. Public companies |
| apply. A private company does not need a separate | | | | within a specific industry generally maintain capital |
| certificate of commencement of business. | | | | structures (debt/equity mixes) that are fairly similar. |
| | | | | That means the relative price/earnings ratios (where |
| 5. Provisions of Section 165 relating to statutory | | | | earnings include the servicing of debt) are usually |
| meeting and submission of statutory report does not | | | | comparable. Private companies within the same |
| apply. | | | | industry, however, can vary widely in capital |
| | | | | structure. The valuation of a privately held business is |
| | | | | therefore frequently based on "enterprise value," or |
| 6. One (if 7 or less members are present) or two | | | | the pre-debt value of a business rather than the |
| members (if more than 7 members are present) | | | | value of the stock of the business, like public |
| present in person at a meeting of the company can | | | | companies. This is another reason why |
| demand a poll. | | | | private-company multiples are generally based on |
| | | | | pre-tax profits and may not be directly comparable |
| 7. In case of a private company which not a | | | | to the price/earnings ratio of public firms. |
| subsidiary of a public limited company or in the case | | | | |
| of a private company of which the entire paid up | | | | 4. Risk profile. Public companies usually provide an |
| share capital is held by the one or more body | | | | assurance of continuing operations above that of |
| corporates incorporated outside India, no person | | | | smaller, privately held firms. Downturns in the |
| other than the member of the company concerned | | | | economy or a change in the environment (such as an |
| shall be entiled to inspect or obtain the copies of | | | | increase in competition or regulatory changes) often |
| profit and loss account of that company. | | | | have a greater impact on private firms than public |
| | | | | firms in terms of performance and market positioning. |
| 8. Minimum number of directors is only two. (3 in | | | | That higher risk may result in a discount in value for |
| case of a public company) | | | | private firms. |
| | | | | |
| | | | | 5. Differences in operations. It is often difficult to find |
| | | | | a public company operating in the same niches as |
| The Company Law Board on being satisfied that the | | | | private firms. Public companies typically have |
| infringement of the aforesaid 3 conditions was | | | | operations spanning a broader range of products and |
| accidental or due to inadvertence or that on other | | | | services than do private companies. In addition, even |
| grounds, it just an equitable to grant relief, may grant | | | | if the products and services are the same, the |
| relief to the company from the consequences of | | | | revenue mix is often different. |
| such infringement. The infringement of the last 3 | | | | |
| conditions does not automatically convert a private | | | | 6. Operational control. Although private companies are |
| company into a public company. It continues to | | | | more likely to receive valuation discounts than public |
| remain a private company; it merely ceases to be | | | | companies, there is at least one area where they |
| entitled to the privileges and exemptions available to | | | | may receive a value premium. While the sale of a |
| a private company. | | | | private company usually results in the purchase of |
| | | | | the controlling interest in the business, ownership of |
| | | | | public-company stock generally consists of a |
| | | | | minority-share ownership-which may be construed to |
| | | | | be less valuable than a controlling-interest position. |