Public and Private Companies (Companies Act, 2013)

Introduction

The Companies Act of 2013 marks a tipping point in the history of corporate governance in India, bringing about a sweeping reform of the law regarding companies doing business in the country. Through its enactment, it replaced the obsolete framework of the Companies Act of 1956 with one that has higher transparency, accountability, and stakeholder protection.

In essence, the Companies Act of 2013 aims to establish a corporate environment that considers the growth needs of businesses while simultaneously addressing the concerns of shareholders, creditors, employees, and the community at large. It includes robust mechanisms for corporate governance, which are driven through stringent disclosure requirements, strengthened shareholder rights, and instrumentalized institutional frameworks for effective oversight and monitoring.

Besides, the Act embodies India’s aspiration to comply with international standards and thus brings the Indian corporate regulatory framework closer to global best practices to assuage the investors’ concerns and spur economic development. The Companies Act 2013 becomes the cornerstone of India’s corporate governance system because of its role in promoting ethical conduct, responsible business practices, and sustainable development that set the nation’s agenda for inclusive and equitable growth.

What is a Company?

In the Companies Act of 2013, a company is a distinct legal entity formed under its provisions or any previous company law. It encompasses various types of business structures such as private companies, public companies, One Person Companies (OPCs), and foreign companies operating in India. A company enjoys a separate legal personality, which means it can own assets, enter contracts, sue, and be sued in its own name. This concept of limited liability shields its shareholders from personal liability for the company’s debts and obligations. The Act provides comprehensive regulations governing the incorporation, management, and dissolution of companies, aiming to promote transparency, accountability, and corporate governance standards. Additionally, it outlines procedures for corporate restructuring, mergers, acquisitions, and insolvency proceedings, ensuring orderly business operations and protection of stakeholders’ interests within the framework of the law.

Type of Companies

The Companies Act of 2013 grants entrepreneurs in India the liberty to set up different types of corporations under it, thus providing them with a legal structure. From the crowd of options, two dominant ones draw attention because of their popularity and applicability; the first one is public, and the second one is private, let get to know them :

Public Company

A public company, as defined under the Indian Companies Act of 2013, is a corporate entity that issues shares to the general public for subscription and trading on the stock exchange. This form of organization is set up to encourage extensive business activities and enable the business ventures to attract significant amount of capital from numerous investors. Public companies are distinguished by their openness and transparency, as they are subject to strict regulatory oversight and compliance regulations.

One of the main characteristics of a public company is its ability to sell shares to the public through an initial public offering (IPO) or subsequent offerings and thus obtain the necessary funds for development, investment, or other important projects. By accessing the capital markets, public companies can attract a wider range of investors, such as institutional investors, retail investors, and foreign investors, which allows them to expand their shareholder base and increase liquidity in the market.

In addition, listed companies are subject to strict corporate governance rules that involve regular financial reporting, disclosure of material information, and compliance with the rules such as insider trading laws. These companies are obliged to have independent directors, set up audit committees, and observe several provisions aimed at the protection of shareholders and all other stakeholders.

Besides the benefits of easy access to capital and improved credibility, public companies are also faced with challenges like increased regulatory oversight, compliance costs, and shareholder activism. Still, the benefits of being a public company, including access to capital markets, visibility, and expansion and growth opportunities often outweigh such challenges, making it an attractive choice for companies looking to grow and create more value for their shareholders. To summarize, public companies play a vital part in propelling economic development, innovation, and wealth creation in India’s burgeoning corporate scene.

Private Company

A private company as defined in the Companies Act 2013 of India is a closely held business entity that has a small number of shareholders and is privately owned and operated. The legal form has several specific advantages that attract start-ups and SMEs as a preferred form of organization.

The limited number of shareholders is the key to a private company – family members, friends, or a few investors. This ownership structure offers more control and flexibility to the promoters or founders thus allowing them to make strategic decisions without any external interference or shareholder oversight.

Another important characteristic of private companies is privacy and confidentiality. Unlike public companies which are required to disclose substantial information to the public and regulatory bodies, private companies have more space to operate in keeping the business information such as operations, financial performance, and business strategies confidential.

Furthermore, private firms face fewer regulatory standards than their public counterparts. They are exempt from some disclosure and compliance obligations, thus lowering the administrative costs of regulatory compliance. This flexibility enables private companies to concentrate on their key business operations and seize growth opportunities without being burdened by unnecessary regulatory red tape.

Furthermore, private companies have high transferability in contrast with public ones. The transfer of shares in a private company is limited to pre-emption rights and the approval of existing shareholders, thus, ownership stays within a small group and the company is protected from undesirable external interference.

In total, private enterprises provide enablement for startups, innovation, and sustainable wealth creation. Their flexibility, confidentiality, and ease of operation make them an attractive alternative for individuals and enterprises who want to set up and manage their businesses with self-sufficiency and convenience through the Companies Act 2013.

Difference between Public and Private Companies

Ownership Structure:

Public companies in India are typically listed on stock exchanges such as the Bombay Stock Exchange (BSE) or the National Stock Exchange of India (NSE). They issue shares to the public and are subject to regulation by the Securities and Exchange Board of India (SEBI). Private companies, on the other hand, are not listed on stock exchanges and have a smaller group of shareholders, often including founders, families, or private equity investors.

Regulation and Reporting:

Indian listed companies are subjected to strict regulatory requirements mandated by SEBI and other regulatory bodies. They are required to observe the regulations on financial reporting, disclosure of material events, corporate governance, and investor protection. This involves periodic filing of financial reports, compliance with accounting principles, and communication of important information to shareholders and the public. Private companies have fewer regulatory requirements when compared to public companies, however, they still need to follow some laws and regulations that apply to all the businesses in India.

Access to Capital:

Public companies in India get exposure to a bigger menu of capital sources than private companies. They do so through the initial public offerings (IPOs) and also the later offerings of shares or debt in stock exchanges. Using the public markets allows public companies to attract capital from the deep cap pool of public markets for the financing of growth, expansion, and what else are corporate initiatives. The difference between private companies and public ones is that they mostly get capital from private sources like banks, venture capital, private equity, or angel investors.

Governance:

Public companies in India are governed by a board of directors elected by shareholders, as per the provisions of the Companies Act, 2013, and SEBI regulations. The board supervises the company’s management, strategic direction, and compliance with regulatory requirements. Public companies are subject to corporate governance standards set by SEBI such as the board composition, duties of independent directors, and disclosure requirements. Private companies tend to have more flexibility when it comes to governance structures and decision-making processes, as ownership groups or founders usually have a greater say in the company’s operations and strategic decisions.

Disclosure and Transparency:

Public companies in India are mandated to have a high level of transparency and disclosure in order that investors are protected and the market is fair. They are obliged to specify the significant data to shareholders and the public, including the financial statements, annual reports, board resolutions, and other material details. This information is accessible via stock exchange filings, company websites, and other public platforms. Private companies are subjected to less stringent disclosure requirements compared to public companies. However, they might be required to provide financial information to some stakeholders like lenders and investors.

Conclusion

The Companies Act of 2013 marks a turning point in shaping India’s corporate governance landscape, fostering greater transparency, accountability, and safeguarding the interests of all stakeholders. The Acts provide for both public and private entities which differ by their nature and implications. Stock exchange-listed public companies have shares to the people in general and are subject to strict regulatory supervision. They enjoy access to capital markets as well as an increased level of reliability, but they also have to deal with challenges such as more stringent regulatory scrutiny and higher costs of compliance. Despite this, the contribution of the IT sector in accelerating economic growth, innovation, and wealth creation in India cannot be overemphasized. On the other side, private companies work with a smaller group of shareholders and have more control, flexibility, and privacy. Despite, they face fewer legal requirements than public companies, they still play an important role in fostering entrepreneurship, innovation, and sustainable wealth generation. The main distinctions between public and private organizations are ownership structure, management, capital access, governance, and disclosure practices. Public companies are strictly controlled by regulatory standards and held to be more accountable. Private companies, on the other hand, operate with more flexibility and freedom. In general, both public and private enterprises are significant players in the Indian corporate system, contributing to growth, creating the environment for innovation, and giving value to stakeholders. Compliance with corporate governance, ethical comportment, and responsible business practices by the firms under Companies Act 14 results in the national agenda of inclusive and equitable growth.

Read this also : Intellectual Property Rights (IPR) in India

BY : Aman Bijoriya ( 3^rd year, B.A.LL.B)