Private Companies: As the name suggests, companies which are owned by a small, private group of people or entities – company’s founders, management or a group of private investors. Transfer of shareholding is restricted unless agreed to by all the shareholders.
What is a public Limited Company in India?
Public Companies: Public companies are owned by a large number of members (i.e. shareholders) and transferability of shareholding between shareholders is not restricted. Mainly these are companies which went public through initial public offering of shares and whose shares are actively bought or sold on a stock exchange, however, THIS IS NOT NECESSARILY A REQUIREMENT TO BECOMING A PUBLIC LIMITED COMPANY.
The main and the most critical difference between publicly and privately held companies is that public companies have shares that can be publicly traded on a stock exchange, or otherwise between its members. A lot of people confuse public companies as being those that are listed on a stock exchange. While all listed companies will necessarily be public limited the reverse is not true.
In fact, many companies which de-list from a stock exchange continue to be public limited companies and their shares can freely trade between shareholders, for example – Essar Steel.
Distinction between a Public ‘LISTED’ Company and a Private Company
Public disclosures: As per the ICDR Regulations issued by the Securities and Exchange Board of India (SEBI), all publicly listed companies must file their financial statements with the stock exchange(s) within 45 days in case they report consolidated accounts and within 30 days in case they chose to report standalone financial accounts. This information is also made available to the shareholders electronically by mailers or in hard copy format. Private companies are not required to publicly disclose their financial information, though one can have a look at their annual accounts by making an RTI application at the Ministry of Corporate Affairs (MCA)’s website.
|Public Company||Private Company|
||Rs. 5,00,000||Rs. 1,00,000|
||at least 7||2|
||at least 3||2|
||no restriction||Restricted in the absence of a unanimous resolution by all shareholders.|
||Mandatory||When paid-up capital is equal to or more than Rs 5 Cr.|
||It invites public to subscribe to its shares||It cannot invite public to subscribe to its shares|
||Five shareholders need to be personally present at the meetings||Two shareholders personally need to present|
- Shares Warrants: A private company cannot issue share warrants against its fully paid shares, whereas a Public Company can issue share warrants against its fully paid up shares.
- Statutory meeting: A private company has no obligation to call a statutory meeting of its shareholders, whereas a public company must call its statutory meeting (i.e. an Annual General Meeting) at least once a year and file statutory report with the register of companies (ROC).
- Issue of Prospectus: A public company is free to invite public for subscription to its shares, whereas a private Company is forbidden from inviting the public for subscription of its shares.
- Name: Under the Companies Act, 1956, the name of a public limited company must end with the word ‘Limited’ and the name of a private limited company must end with the word ‘Private Limited’.
Because of the difference in the organizational/ legal structure of both types of companies, the rules and regulation applicable to these companies differ. Further, once listed, the value of a company is pretty much determined by the market, this is premised on the principle of efficient market hypothesis. While the shares of a company may trade at a discount or a premium from time to time, the market capitalization is known to all at any given point.
For a private company on the other hand, the true worth is your best guess!
Public vs. Private Company Valuations – Challenges
Some of the factors due to which the valuations of private and public companies differ include:
- Economic risk: During an economic slowdown, public companies rely on public equity and debt markets for financial support, but private companies do not have the same level of financial protection. As a result, private companies are more sensitive to economic conditions. For this reason, often when I-banks set a valuation for private companies, they differ tremendously depending upon the broader economic environment. This is exactly why the IPO (i.e. public offering) activity slows down during depressed economic environments.
- Size and infrastructure: In general, private companies are smaller in size as compared to public companies. This allows public companies to have stronger brand equity and to operate with greater economies of scale which makes them more efficient and enables them to provide the same product or service to customers at lower costs.
- Profitability: Private companies seek to minimize their tax, while public companies seek to increase profits for shareholders. For these and other such operational reasons it becomes difficult to measure true earnings and cash flows of private company.
- Capital structure: Private companies, unlike public companies, do not have broad access to capital and therefore are unable to be as selective for their funding sources as public companies. Public companies are able to choose from both equity and debt sources to minimize their cost of capital while private companies are primarily dependent on bank loans (or at best – private equity), which are relatively expensive and weaken the balance sheet, or internal cash flows of the company.