What is a public company?
A public limited company (PLC) is a business entity that offers shares of stock to the public through a stock exchange. These shares can be bought by anyone, which allows the company to raise substantial capital for expansion. Public companies are legally required to provide financial transparency and are often subject to regulatory scrutiny. This openness attracts investors who seek to buy shares and benefit from the company's growth through dividends and rising stock prices. Additionally, public companies must comply with stringent corporate governance standards, ensuring accountability to shareholders and the public.
Public companies in India are governed by the Companies Act, 2013. A public limited company can be formed with a minimum of seven shareholders and three directors. The company must also have a minimum paid-up capital as required by law. The ability to raise capital from the public makes these companies attractive for large-scale operations, but they also face greater regulatory oversight and transparency obligations.
Types of public companies
- Listed companies: These companies have their shares listed on recognised stock exchanges like the Bombay Stock Exchange (BSE) and National Stock Exchange (NSE).
- Unlisted companies: Shares are not listed on any public stock exchange, but these companies still offer shares to the public through other means like private placements.
- Government companies: Public companies with majority ownership held by the government.
- Multinational public companies: These companies operate globally but have their shares listed on Indian stock exchanges as well.
Transparency and continuing disclosures of public company
- Quarterly financial reports: Public companies must disclose their financial performance through quarterly earnings reports. These reports provide detailed information about revenue, profit margins, and other financial metrics.
- Annual general meeting (AGM): Public companies are required to hold an AGM where shareholders can ask questions, vote on resolutions, and get updates on the company’s performance.
- Corporate governance disclosures: Public companies must disclose the structure of their board of directors, management policies, and any significant changes in governance, ensuring accountability.
- Insider trading reports: The Securities and Exchange Board of India (SEBI) mandates the disclosure of any insider trading activities by the company’s directors, officers, or key personnel to ensure fairness.
Advantages of public company
- Access to capital: The primary advantage is the ability to raise funds by offering shares to the public. This capital can be used for expansion, research, and other business activities.
- Increased visibility: Public companies often enjoy greater media attention, which can enhance their brand value and market presence.
- Diversified ownership: By allowing the public to buy shares, the company diversifies its ownership base, reducing the influence of any single shareholder.
- Enhanced credibility: Being publicly listed increases the company’s credibility in the eyes of investors, partners, and customers, leading to better business opportunities.
Disadvantages of public companies
- Regulatory scrutiny: Public companies face stringent regulations from bodies like SEBI, which can slow decision-making processes.
- Loss of control: The original owners or founders may lose control over the company as shareholders gain voting rights on key issues.
- Costly compliance: Public companies are required to invest heavily in legal and financial reporting to meet compliance standards, increasing operational costs.
- Pressure for short-term performance: Public companies often face pressure from shareholders to deliver quarterly profits, which may impact long-term growth strategies.
How do companies become public companies?
- Initial Public Offering (IPO): A company can become public by offering its shares to the public through an IPO. This process involves extensive regulatory approvals and disclosures.
- Compliance with SEBI guidelines: To go public, a company must meet all the criteria set by SEBI, such as financial audits, disclosures, and minimum paid-up capital.
- Approval from the board of directors: The decision to go public must be approved by the company’s board of directors.
- Selection of underwriters: Companies usually hire investment banks or underwriters to manage the IPO process, set the price of shares, and attract investors.
- Listing on a recognised stock exchange: After the IPO, the company’s shares are listed on a stock exchange such as NSE or BSE, making it a public limited company.
Difference between public and private company
A public limited company is listed on stock exchanges and can sell shares to the public, while a private company does not offer shares to the public and is usually owned by a small group of investors. Public companies must adhere to stricter regulatory standards and provide regular financial disclosures, whereas private companies enjoy greater operational flexibility with less scrutiny.
Public companies are also required to hold an annual general meeting (AGM) and are subject to greater media attention. In contrast, private companies maintain more privacy and control over their operations. The difference between a private and public company lies primarily in ownership structure, regulatory compliance, and financial disclosure requirements.
Special Considerations
Sometimes, a public company may decide it no longer wants to operate under the rules of being a public company. There are many reasons for this decision. The company might want to avoid the expensive and time-consuming regulations that public companies must follow. Or it may want to use its resources for research and development, new equipment, and employee pension plans.
To become private again, a "take private" transaction is needed. This means a private equity firm, or a group of them, buys all the shares of the public company. They may need to get extra funding from an investment bank or another lender to afford the purchase.
Once all the shares are bought, the company will be removed from the stock exchanges and will operate as a private company again.
Conclusion
While public companies offer advantages like access to capital and enhanced credibility, they also face significant challenges, such as regulatory scrutiny and pressure to meet shareholder expectations. For businesses considering going public, careful planning and compliance with SEBI guidelines are essential. Opting for a public or private structure depends on the business’s long-term goals. Whether public or private, securing Bajaj Finserv Business Loan can help companies manage working capital and fuel growth strategies.
