Page 198 - DMGT407Corporate and Business Laws

Unit 7: Concept of a Company

7.5.1 Private and Public Companies Notes

Either of the above kinds of companies (i.e., a limited liability company and an unlimited
liability company) may be private or public (s.12).
A private company can be formed by merely two persons by subscribing their names to the
Memorandum of Association. It means a company which has a minimum paid-up capital of one
lakh rupees or such higher paid up capital as may be prescribed; and by its Articles:
1. restricts the rights of its members to transfer shares;
2. limits the number of its members to fifty, excluding its employee-members or past
employee-members; provided that where two or more persons hold one or more shares
in a company jointly, they shall, for the purpose of this definition, be treated as a single
member;

3. prohibits an invitation to the public to subscribe to its shares and debentures; and
4. prohibits any invitation or acceptance of deposits from persons other than its members,
directors or their relatives.

A public company means a company which (a) is not a private company; (b) has a minimum
paid-up capital of ` 5 lakhs or such higher paid-up capital as may be prescribed; (c) is a private
company which is a subsidiary of a company which is not a private company. Section 12 prescribes
the minimum number of members as seven who have to subscribe their names to the
memorandum of association but there is no restriction with regard to the maximum number of
members of a public company. A public company may or may not invite public to subscribe to
its share capital. In case, it decides to invite public to subscribe to its share capital, then it has to
issue a prospectus. In case, it decides not to invite public to subscribe to its share capital and
arranges the capital privately then it need not issue a prospectus; it has simply to submit a
statement in lieu of prospectus with the Registrar of Companies at least three days before it can
make allotment of shares. The articles of such a company do not contain provisions restricting
the right of members to transfer their shares.

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Caution It has to be remembered that under the Securities (Contracts) Regulation Act,
1956, shares and debentures of public companies only are capable of being dealt in on a
stock exchange.

7.5.2 Distinction between Private and Public Company

Following are the main points of distinction between a private and a public company:
1. In the case of a private company minimum number of persons to form a company is two
while it is seven in the case of a public company.
2. In case of a private company the maximum number of members must not exceed fifty
whereas there is no such restriction on the maximum number of members in case of a
public company.
3. In private company the right to transfer shares is restricted, whereas in case of public
company the shares are freely transferable.
4. A private company cannot issue a prospectus, while a public company may, through
prospectus, invite the general public to subscribe for its shares or debentures.

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