How do public limited companies work?
Public limited companies in India are those that have converted from private limited companies to public limited companies by offering shares to the general public. These companies are not required to register on the share market; registration is entirely optional. However, as they offer shares to a host of investors, SEBI requires them to make their financial reports public every quarter. Furthermore, the companies must seek permission from SEBI for every future fundraising round.
The shareholders can sell the shares of the company whenever they want on the stock exchanges using their stockbroking platform. As long as the company maintains seven shareholders, it will be defined as a public limited company.
Types of public limited companies
A public limited company, often abbreviated as PLC, is a type of corporation that offers its shares to the general public for purchase. This allows the company to raise significant capital through public subscription. There are primarily two main types of public limited companies:
1. Listed public companies
These companies are registered with a stock exchange, such as the Bombay Stock Exchange (BSE) or the National Stock Exchange (NSE) in India. Listing on a stock exchange allows the company's shares to be traded freely in the open market. This offers several benefits, including:
- Enhanced liquidity: Shares can be easily bought and sold, making it easier for investors to enter or exit their positions.
- Increased visibility: Listing on a stock exchange exposes the company to a wider audience, potentially attracting more investors and customers.
- Improved credibility: Being listed on a reputable exchange can enhance the company's reputation and credibility.
2. Unlisted public companies
Unlisted public companies are not registered with any stock exchange. While they are still public companies, their shares are not traded on a public market. This can be due to various reasons, such as:
- Smaller size: The company may be too small or relatively new to warrant listing on a stock exchange.
- Family control: The controlling shareholders may prefer to maintain a significant degree of control over the company, which can be more challenging when shares are publicly traded.
- Industry-specific factors: Certain industries may have regulations or practices that make listing less attractive.
While unlisted public companies may not have the same level of liquidity or visibility as listed companies, they can still benefit from the legal structure and limited liability offered by the public company form.
In conclusion, both listed and unlisted public companies offer distinct advantages and disadvantages. The choice of whether to list on a stock exchange depends on the company's specific goals, size, industry, and the preferences of its shareholders.
Requirements to start a Public Limited company
Adherence to several regulations outlined in the Companies Act 2013 is essential for establishing a Public Limited Company (PLC). Here is a comprehensive checklist outlining the key steps for registration:
- Minimum shareholders: Ensure a minimum of seven shareholders for the company.
- Director appointments: Appoint at least three Directors to oversee company operations.
- Minimum share capital: Allocate a minimum share capital of ₹5 lakh to initiate the registration process.
- Digital Signature Certificate (DSC): Obtain a DSC for one of the Directors, along with self-attested copies of identity and address proofs.
- Director Identification Numbers (DIN): Obtain DINs for all appointed Directors.
- Company name registration: File an application to register the company name, ensuring it complies with regulatory guidelines.
- Define company objectives: Prepare and submit an application outlining the company's main object clause, defining its primary objectives post-incorporation.
- Submit supporting documents: Submit the required supporting documents, including the Memorandum of Association (MoA), Form DIR-12, Articles of Association (AoA), and other relevant documents.
- Pay registration fees: Complete the payment for registration fees as prescribed by the Registrar of Companies (ROC).
- Obtain business commencement certificate: Upon approval from the ROC, apply for and obtain the Business Commencement Certificate, marking the official commencement of business activities.
List of documents required for Public Limited Company
Here's a list of documents typically required for registering a Public Limited Company (PLC) in India:
- Memorandum of Association (MoA)
- Articles of Association (AoA)
- Director Identification Number (DIN) for each director
- Digital Signature Certificates (DSC) for directors
- Necessary forms: Forms DIR-12, INC-7, and INC-22
- Director identification: Identity and address proof of all directors
- Registered office address proof: Proof of the registered office address
- Compliance declaration: A declaration of adherence to the Companies Act, 2013
- Board resolution: A copy of the Board Resolution approving the company's incorporation
- Bank statements: Recent bank statements for the past two months
- Company identification: Company PAN and TAN
- Certificate of incorporation (COI): Issued by the Registrar of Companies (ROC)
- Business commencement certificate: If applicable
- Other relevant documents: Any other documents as may be required by the ROC or other regulatory authorities.
Process of Public Limited Company registration: Step-by-step guide
Here's a step-by-step guide to the registration process for a Public Limited Company (PLC) in India:
- Obtain Director Identification Numbers (DINs): Acquire DINs for each director through the Ministry of Corporate Affairs (MCA) web portal.
- Acquire Digital Signature Certificates (DSCs): Obtain DSCs for the directors. These are essential for digitally signing documents during the registration process.
- Draft MoA and AoA: Draft the Memorandum of Association (MoA) and Articles of Association (AoA) outlining the company's objectives, rules, and regulations. These documents1 must be filed with the Registrar of Companies (ROC).
- Apply for Company Name Approval: Apply to the ROC for approval of the chosen company name, ensuring it complies with the relevant guidelines.
- File Incorporation Documents: Prepare and file the necessary incorporation documents, including Form INC-7 (for incorporation), Form INC-22 (for address proof of the registered office), and Form DIR-12 (for director appointment).
- Pay Registration Fees: Pay the registration fees online.
- ROC Verification and COI Issuance: Once submitted, the documents undergo verification by the ROC. Upon successful verification, a Certificate of Incorporation (COI) will be issued.
- Commence Business Operations: After receiving the COI, the company can commence business operations.
- Obtain Certificate of Commencement: After receiving the COI, apply for a Certificate of Commencement. This step is necessary to officially commence business activities.
Advantages of a public limited company
Public Limited Companies offer several advantages over other business structures. These benefits stem from their unique characteristics:
- Limited liability: Shareholders are shielded from personal financial liability in the event of company insolvency.
- Transferability of shares: Shares can be easily traded on stock exchanges, providing investors with liquidity and flexibility.
- Enhanced government support: Public Limited Companies often have preferential access to government schemes, incentives, and subsidies designed to foster economic growth.
- Professional management: They are typically governed by a board of directors comprising experienced professionals in various business domains.
- Greater capital access: Public Limited Companies can raise capital by issuing shares to the public, tapping into a broader pool of investors and securing substantial funding.
Disadvantages of public limited company
Public Limited Companies, while offering certain advantages, also present several drawbacks that may deter investors. Understanding these limitations is crucial for making informed decisions.
- Regulatory burden: Public companies face stringent regulatory compliance, including financial reporting and shareholder communication. This can increase operational costs and administrative burdens.
- Dilution of ownership: Issuing shares to the public can lead to a dilution of ownership, potentially reducing the control of existing shareholders.
- Limited control over share price: Public companies have limited influence over their share price, which is subject to market fluctuations and investor sentiment.
- High costs of going public: The process of going public is often costly and time-consuming, requiring substantial legal and financial resources.
- Pressure to perform: Public companies are under constant pressure to deliver strong financial performance and meet shareholder expectations. This can create a demanding and competitive environment.
Public limited company vs private limited company
Category
|
Public Limited Company
|
Private Limited Company
|
Meaning
|
A joint stock company with shares listed on a stock exchange.
|
A closely held company with shares not listed on a stock exchange.
|
Paid-up Capital (Minimum)
|
Rs. 5,00,000
|
Rs. 1,00,000
|
Subscription from the Public
|
Allowed
|
Not allowed
|
Directors (Minimum)
|
3
|
2
|
Retirement of Directors
|
At least ⅔ Directors to retire by rotation annually.
|
No such restrictions.
|
Appointment of Directors
|
Only one Director can be appointed through a single resolution.
|
Two or more Directors can be appointed through a single resolution.
|
Articles of Association
|
Can frame its own or adopt Table F.
|
Must frame its own.
|
Quorum
|
5 members for ≤ 1000 members, 15 members for > 1000 but < 5000 members.
|
2 members constitute a quorum.
|
How to invest in a public limited company?
Investing in public limited companies can be done in two ways:
1. Invest through Primary market
The primary market is the initial public offering (IPO) stage where a company lists its securities for the first time on a stock exchange. This allows investors to purchase shares directly from the company.
A follow-on public offer (FPO) occurs when an already-listed company issues additional securities to raise capital.
2. Invest through Secondary market
In the secondary market, existing securities are traded between investors. This market includes a variety of financial assets, such as debentures, bonds, options, commercial papers, and treasury bills. Transactions in the secondary market take place between investors, not between an investor and the company as in the primary market.
Examples of public limited company
Examples of public limited companies in India are:
- Indian Oil Corporation Limited
- Bharat Petroleum Corporation Limited
- State Bank of India
- Hindustan Petroleum Corporation Limited
- Oil and Natural Gas Corporation Limited
Who owns a public limited company?
Public limited companies are managed and operated by their Board Of Directors but are owned by the shareholders who hold the company's shares in their demat accounts. The ownership value is based on the number of shares an individual shareholder holds.
Features of a public limited company
Key Features of a Public Limited Company
- Separate legal entity: Exists independently of its shareholders.
- Easy transferability of Shares: Shares can be easily traded among investors.
- Limited liability: Shareholders are only liable up to the amount invested.
- Paid-up capital: Minimum paid-up capital of ₹5,00,000 is required.
- Company name: Must end with "Limited" or "Ltd."
- Directors: Minimum 3, maximum 12, elected by shareholders.
- Prospectus: Required for public offerings of shares.
- Borrowing capacity: Can raise funds through debt, equity, and loans.
- Number of members: Minimum 7 shareholders, no upper limit.
- Voluntary association: Easy for shareholders to join or leave.
- Minimum subscription: 90% of shares offered must be subscribed.
- Certificate of commencement: Required along with Certificate of Incorporation.
- Memorandum of Association (MoA): Defines the company's objectives, essential for registration.
Conclusion
If you are looking to invest in the capital market, understanding public limited companies' meaning is crucial. Public limited companies in India have their shares listed on the stock exchanges, which you can buy for dividend income or capital gains. However, ensure that you analyse the public limited company names, their fundamentals, and market capitalisation before investing.
Check out other articles
