CENTRAL UNIVERSITY OF SOUTH BIHAR

SCHOOL OF LAW AND GOVERNANCE

Project Work Of Company Law

Topic: Public Company & Private Company

Name : Pushpanjali Kumari

Course : B.A. LLB. (Hons.)
Semester : 7th
Enrollment No. : CUSB1513125032
Submitted To : Dr. P.K. Das

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 CHAPTERIZATION
 TITTLE:
Company, its classification and detailed study about public company and private
company

 INTRODUCTION:
Brief introduction about topic
 DEFINITION AND CHARACTERISTICS OF COMPANY:
 CLASSIFICATION OF COMPANY:
A. On basis of Incorporation
B. on basis of liability
C. On basis of control
D. On basis of ownership
E. On basis of nationality
F. On basis of number of members
 PRIVATE COMPANY:
 Explanation
 Interpretation of Definition
 Other requirements
 Special privileges and exemptions
 OPC
 Small Company
 PUBLIC COMPANY:
 Explanation
 Other requirements
 Advantages
 DISTINCTION BETWEEN PUBLIC COMPANY AND PRIVATE
COMPANY
 CONVERSION OF PUBLIC COMPANY INTO PRIVATE
COMPANY AND VICE VERSA
 CONCLUSION

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 ACKNOWLEDGEMENT
It is a great pleasure for me to present the final draft of the project topic. I
am very much obliged to my revered teacher Dr. Pradeep Kumar Das
(Assistant Professor) of Central University of South Bihar, Gaya who has
given me a task to complete the project work. I am very much helped by
him regarding the formation of this final project.
I express my heartfelt indebtedness to Dr. Pradeep Kumar Das who
showed me the path and helped me to understand the project topic. It was
not possible for me to make the final project if I was not being helped by
him. He acted as my mentor and also a guide to help me to understand the
whole of the provision and provided me with the proper synopsis of the
project work.
I would like to express my gratitude towards my parents for their kind co-
operation and encouragement which help me in completion of this final
draft.
I would like to express my special gratitude and thanks to the
computer lab assistant who provided me all the facilities regarding the
conditioned computer with a good wi-fi net.
My thanks and appreciations also go to my colleague in developing
the project and people who have willingly helped me out with their
abilities.

Thanks

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 INDEX

Sr. no. CONTENTS Pg no.

01. Introduction 05
02. Definition of Company 06
03. Features & characteristics of company 07-09
04. Classification of company
A. On basis of Incorporation 10
B. 0n basis of liability 11
C. On basis of control 12
D. On basis of ownership 12
E. On basis of nationality 12
F. On basis of number of members
05. Private Company
 Interpretation of Sec 2(68) 13
 Other requirements of Private Co. 14
 Advantages of Private Company 15
 Special privileges & Exemptions 16-18
 One person Company 19
 Small Company 20
06. Public Company 21
 Other requirements of Public co. 22
 Advantages of Public Company 23
07. Comparison Between Public Company 24
And Private Company
09. Conversion of Private Company into 25
Public Company
10. Conversion of Public Company into 26
Private Company
11. Conclusion 27

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INTRODUCTION:
The word company has no strict or legal meaning. It has been originated from two words
‘com’ and ‘panies’. ‘Com’ means together and ‘panies’ means profit. Altogether it can be
said that group of individuals who have come together to earn profit. It may be described to
imply an association of persons for some common object or some purposes for which people
may associate themselves are multifarious and include economic as well as non-economic
objectives. But, in common parlance, the word ‘company’ is normally reserved for those
associated for economic purposes, i.e. to carry on business or gain. Used in the aforesaid
sense, the word company in simple terms may be described to mean a voluntary association
of persons who have come together for carrying on the business and sharing the profits
therefrom. The company legislation in India closely follows company legislation of England.
In the common law, a company is a juristic personality or legal person separate from its
member which exists only in the contemplation of law. The company, just like a natural
person possesses similar rights and owes similar obligations, but has neither a mind nor a
body of its own.

Industrial has revolution led to the emergence of large scale business organizations. This has
led to opening of various industries, companies, joint ventures, and uplifted business sectors.
So regulation is also required. Companies Act provide for the regulation of this. Earlier
before independence, these were governed by English Legislation. Company’s legislation of
England governed all the companies business in India. After Independence, committee was
established and the law was enacted and it resembled the Company’s Legislation of England
somehow. Since enactment several amendments have been made in this law time to time.

Section 2(20) of the Companies Act, 2013 deals with company. It says the company means
company established under this act or any other previous company law. Company have
several characteristics as such separate legal entity, corporate personality, limited liability etc.
There are several classifications of company. On basis of number of members, company is of
two types- Public company and Private Company. According to Sec. 3(1) (iii) of the Indian
Companies Act, 1956, a private company is that company which by its articles of association:
i) limits the number of its members to fifty, excluding employees who are members or ex-
employees who were and continue to be members;
ii) restricts the right of transfer of shares, if any;
iii) Prohibits any invitation to the public to subscribe for any shares or debentures of the
company.
According to Section 3 (1)(iv) of Indian Companies Act. 1956. “A public company which is
not a Private Company”. If we explain the definition of Indian Companies Act. 1956 in
regard to the public company, we note the following:
i) The articles do not restrict the transfer of shares of the company
ii) It imposes no restriction no restriction on the maximum number of the members on the
company.
iii) It invites the general public to purchase the shares and debentures of the companies

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DEFINITION OF COMPANY:
The Companies Act, 2013 does not define a company in terms of its features. Section 2(20)
of the Companies Act, 2013 defines a company to mean a company incorporated under this
Act or under any previous company law. This definition does no clearly point out the
meaning of a company.

Definitions by various jurists and country’s perspective:

 According to law in UK:

A company is a body corporate or an incorporated business organization registered under the
companies act. It can be a limited or an unlimited company, private or a public company,
company limited by guarantee or a company having a share capital, or a community interest
company.
 According to the law in the USA:
A company can be a “corporation, partnership, association, joint-stock company, trust, fund,
or organized group of persons, whether incorporated or not, and (in an official capacity) any
receiver, trustee in bankruptcy, or similar official, or liquidating agent, for any of the
foregoing1.”
 The Companies Act of India defines a company as-
A registered association which is an artificial legal person, having an independent legal,
entity with a perpetual succession, a common seal for its signatures, a common capital
comprised of transferable shares and carrying limited liability.
 A more precise, global and modern definition of a company could be:
A business entity which acts as an artificial legal person, formed by a legal person or a group
of legal persons to engage in or carry on a business or industrial enterprise.
Few points that should be noted in this definition:

Legal Person: A legal person could be human or a non-human entity which is recognised by
law as having legal rights and is subject to obligations.

A person or a group of persons: It is no more required to be an association of persons to form

a company. A company can also be started as a single person company (one-person
company).
 Lord Justice Lindley:

“A company is an association of many persons who contribute money or monies worth to a

common stock and employed in some trade or busines8 and who share the profit and loss
arising therefrom”2.

1
https://www.feedough.com/
2
“Taxmann’s”, “Company Law And Practise”, 23rd Edition 2018( Pg no-06)

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  Chief Justice Marshall

“A corporation is an artificial being, invisible, intangible, existing only in contemplation of

the law. Being a mere creation of law, it possesses only the properties which the Charter of its
creation confers upon it, either expressly or as incidental to its very existence."

 Prof. Haney

“A company is an artificial person created by law, having separate entity, with a perpetual
succession and common seal”.

FEATURES AND CHARACTERISTICS OF A COMPANY:

Following are the characteristics features of a company:

1. Incorporated association
A company is created when it is registered under the Companies Act. It comes into being
from the date mentioned in the certificate of incorporation. For forming a public company at
least seven persons and for a private company at least two persons are persons are required.
These persons will subscribe their names to the Memorandum of association and also comply
with other legal requirements of the Act.

2. Artificial legal person

A company is an artificial person. It is not a natural person. It exists in the eyes of the law
and cannot act on its own. It has to act through a board of directors elected by shareholders. It
was rightly pointed out in Bates V Standard Land Co. that: “The board of directors are the
brains and the only brains of the company, which is the body and the company can and does
act only through them”.
But for many purposes, a company is a legal person like a natural person. It has the right to
acquire and dispose of the property, to enter into contract with third parties in its own name,
and can sue and be sued in its own name3.

3. Separate Legal Entity :

A company has a legal distinct entity and is independent of its members who constitute it.
Lord Macnaughten puts it,-the company is at law a different person altogether from its
subscribers. The creditors of the company can recover their money only from the company
and the property of the company. Similarly, the company is not in any way liable for the
individual debts of its members. The property of the company is to be used for the benefit of
company and nor for the personal benefit of the shareholders

3
“Avatar Singh”, Company Law, Eastern Book Company, 16 th edition( pg no- 05-06)

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  The principal of separate of legal entity was explained and emphasized in the famous
case of Solomon v Solomon & Co. Ltd4.

Solomon was a prosperous leather merchant. He converted his business into a limited
company- Solomon & Co. Ltd. The company so formed consisted of Solomon, his wife and
his five of children as members. Solomon and his two of sons were in Board of directors.
After a short duration, the company went into liquidation. At that time the statement of
affairs’ was like this: Assets: $ 6000, liabilities; Solomon as debenture holder $ 10,000 and
unsecured creditors $ 7,000. Thus its assets were running short of its liabilities b $11,000.
The unsecured creditors claimed a priority over the debenture holder on the ground that
company and Solomon was one and the same person.

But the House of Lords held that the existence of a company is quite independent and distinct
from its members and that the assets of the company must be utilized in payment of the
debentures first in priority to unsecured creditors. Solomon’s case established beyond doubt
that in law a registered company is an entity distinct from its members, even if the person
hold all the shares in the company.
Hence the business belonged to company not Solomon.

 Lee V. Lee’s Air farming Ltd5

Of the 3000 shares in Lee’s Air Firming Ltd., Lee held 2999 shares. He voted himself the
managing Director and also became Chief Pilot of the company on a salary. He died in an air
crash while working for the company. His wife was granted compensation for the husband in
the course of employment. Court held that Lee was a separate person from the company he
formed, and compensation was to be given to the widow. Thus, the rule of corporate
personality enabled Lee to be the master and servant at the same time. Company is separate
corporate personality.

 In Re Kondoli Tea Co Ltd.6,

It was held by Calcutta High Court that a company was a separate person, a separate body
altogether different from its Shareholders.

4
[1895-1899]All.ER 33 (HL)
5
[1960] 3 All. ER 420 (PC)
6 (1886 ILR 13 Cal 43)

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 4. Perpetual Existence
A company is a stable form of business organization. Its life does not depend upon the death,
insolvency or retirement of any or all shareholder or director. Law creates it and law alone
can dissolve it. Members may come and go but the company continues on for ever. Thus, a
company has a perpetual existence, irrespective of changes in its membership. Death or
retirement of members leaves the company unaffected.

5. Common Seal
As was pointed out earlier, a company being an artificial person has no body similar to
natural person and as such it cannot sign documents for itself. It acts through natural person
who are called its directors. But having a legal personality, it can be bound by only those
documents which bear its signature. Therefore, the law has provided for the use of common
seal, with the name of the company engraved on it, as a substitute for its signature. Any
document bearing the common seal of the company will be legally binding on the company.

6. Limited Liability :
A company may be company limited by shares or a company limited by guarantee. In
company limited by shares, the liability of members is limited to the unpaid value of the
shares. For example, if the face value of a share in a company is Rs. 10 and a member has
already paid Rs. 7 per share, he can be called upon to pay not more than Rs. 3 per share
during the lifetime of the company. In a company limited by guarantee the liability of
members is limited to such amount as the member may undertake to contribute to the assets
of the company in the event of its being wound up.

7. Transferable Shares
In a public company, the shares are freely transferable. The right to transfer shares is a
statutory right and it cannot be taken away by a provision in the articles. However, the
articles shall prescribe the manner in which such transfer of shares will be made and it may
also contain bona fide and reasonable restrictions on the right of members to transfer their
shares. But absolute restrictions on the rights of members to transfer their shares shall be ultra
vires. However, in the case of a private company, the articles shall restrict the right of
member to transfer their shares in companies with its statutory definition.

8. Separate Property
As a company is a legal person distinct from its members, it is capable of owning, enjoying
and disposing of property in its own name. Although its capital and assets are contributed by
its shareholders, they are not the private and joint owners of its property. The company is the
real person in which all its property is vested and by which it is controlled, managed and
disposed of7.

7
“Avatar Singh”, Company Law, Eastern Book Company, 16 th edition( pg no-06-08)

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CLASSIFICATION OF COMPANIES:
The Companies Act 2013 provides for variety of company that may be promoted,
incorporated and registered under this Act. Classifications have been made on several basis
such as liability, incorporation, ownership, number of members etc.

A. On the basis of incorporation8:

Depending on the mode of incorporation, there are three classes of companies. They are:

1) Chartered companies
These are incorporated under a special charter by a monarch. The East India Company and
The Bank of England are examples of chartered incorporated in England. The powers and
nature of business of a chartered company are defined by the charter which incorporates it. A
chartered company has wide powers. It can deal with its property and bind itself to any
contracts that any ordinary person can. In case the company deviates from its business as
prescribed by the charted, the Sovereign can annul the latter and close the company. Such
companies do not exist in India.

2) Statutory Companies
These companies are incorporated by a Special Act passed by the Central or State legislature.
Reserve Bank of India, State Bank of India, Industrial Finance Corporation, Unit Trust of
India, State Trading Corporation and Life Insurance Corporation are some of the examples of
statutory companies. Such companies do not have any memorandum or articles of
association. They derive their powers from the Acts constituting them and enjoy certain
powers that companies incorporated under the Companies Act have.

3) Registered or incorporated companies

These are formed under the Companies Act, 1956 or under the Companies Act passed earlier
to this. Such companies come into existence only when they are registered under the Act and
a certificate of incorporation has been issued by the Registrar of Companies. This is the most
popular mode of incorporating a company.

8
www.legalindia.in

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 B. On The Basis of Liability:

1) Company with limited liability.

It is again divided into two- Limited by shares and limited by guarantee.
2) Company with unlimited liability.

1. Company with limited liability

a) Company limited by shares:[ section 4(1)(d)(i)]

These types of companies have a share capital and the liability of each member or the
company is limited by the Memorandum to the extent of face value of share subscribed by
him. In other words, during the existence of the company or in the event of winding up, a
member can be called upon to pay the amount remaining unpaid on the shares subscribed by
him. Such a company is called company limited by shares.

b) Company limited by guarantee: [section 4(1)(d)(ii)]

A company limited by guarantee may be defined as a company having liability of its

members limited by the memorandum to such amount as the members may respectively
contribute to undertake:

 To the assets of the company in the event of company in its being wound-up while he
is a member or within one year after he ceases to be a member, for payment of the
debts and liabilities of the company or of such debts and liabilities as may have been
contracted before he ceases to be a member, as the case may be and
 To the costs, charges, and expenses of winding-up and for the adjustment of rights of
the contributories among themselves9.
2. Company with unlimited liability

Section 12 gives choice to the promoters to form a company with or without limited
liability. A company not having any limit on the liability of its members is called an
‘unlimited company’ [Sec 12(c)]. An unlimited company may or may not have a share
capital. If it has a share capital it may be a public company or a private company. If the
company has a share capital, the article shall state the amount of share capital with which
the company is to be registered [Sec 27 (1)].The articles of an unlimited company shall
state the number of member with which the company is to be registered.

9
“Taxmann’s”, “Company Law And Practise”, 23rd Edition 2018( Pg no-44)

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 C. On the basis of Control:

1) Holding Company: [section 2(46)]

A company is known as the holding company of another company if it has control over the
other company. According to Sec 4(4), a company is deemed to be the holding company of
another if, but only if that other is its subsidiary.

2) Subsidiary Company:[section 2(87)]

A company is known as a subsidiary of another company when its control is exercised by the
latter (called holding company) over the former called a subsidiary company. All powers are
exercised by holding company i.e. to say managerial decision lies with holding companies.

D. On the basis of Ownership of companies10:

1) Government Companies:[section 2(45)]
A Company of which not less than 51% of the paid up capital is held by the Central
Government of by State Government or Government singly or jointly is known as a
Government Company. It includes a company subsidiary to a government company. The
share capital of a government company may be wholly or partly owned by the government,
but it would not make it the agent of the government. The auditors of the government
company are appointed by the government on the advice of the Comptroller and Auditor
General of India.

2) Non-Government Companies:
All other companies, except the Government Companies, are called non-government
companies. They do not satisfy the characteristics of a government company as given above.

E. On the basis of Nationality of the Company:

1) Indian Companies:
These companies are registered in India under the Companies Act. 1956 and have their
registered office in India. Nationality of the members in their case is immaterial.

2) Foreign Companies:
It means any company incorporated outside India which has an established place of business
in India [Sec. 591 (I)]. Section 592 to 602 of Companies Act, 1956 contains provisions
applicable to foreign companies functioning in India11.

10
www.company-formation.co.in
11
www.company-formation.co.in

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 F. On the Basis of Number of members:

I. PRIVATE COMPANY: [Section 2(68)]

A private company cannot be owned by the public; it restricts the number of members, the
right to transfer its shares and prohibits any invitation to the public to subscribe for any shares
or debentures of the company.

In UK: A private company is a separate legal entity with a suitable company name, an
address, at least one director, at least one shareholder, and memorandum of association and
article of association.

In India: A private company is a separate legal entity with a suitable company name, an
address, at least 2 members and at most 200 members, and at least two directors with one
being an Indian resident.

By virtue of section 2(68), as amended by Companies Act, 2015, a private company means a
company having a minimum paid up share capital, as may be prescribed, and which by its
articles:

a) Restricts the right to transfer its shares, if any;

b) Limits the number of its members to 200 not including:-
i. Persons who are in the employment of the company.
ii. Persons who, having been formerly in the employment of the company, were
members of the company while in that employment and have continued to be
members after the employment ceased; and
Where two or more persons hold one or more shares in a company jointly, they
shall, for the purposes of membership, be treated as a single member.

c) Prohibits any invitation to the public to subscribe for any shares or securities of the
company12.

Interpretation of section 2(68):

 Restriction on transferability of shares:

A private company has to contain the specific restrictions so as to prevent anybody or
everybody acquiring shares of the company by transfer and thereby defeating the very
objective of company. This restriction should uniformly apply to all the shareholders of the
private company. However, this restriction should not be construed as a ban on transfer of
shares. It is important to note that this restriction is relevant only in case of a private company
having share capital and, therefore, is inapplicable to a private company incorporated as a
pure guarantee company. Only restrictions contained in articles are valid The only
permissible restrictions on transferability are those contained in the company’s articles of
association. An additional restriction not contained in the articles but in a private agreement
between two shareholders which places further obstacles in the way of transferability is not
binding either on the company or on the shareholders13.

12
”Taxmann’s”, “Company Law And Practise”, 23rd Edition 2018( Pg no-30-31)

13
V.B. Nagaraj v. V.B. Gopalakrishnan [1991] CLA 211 (SC)

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  Limitation on number of members:
A private company is required compulsorily to limit through its articles, the number of
members to 200, taking joint holders as single member and also not counting present or past
employees who are members. It has been observed that directors are not considered to be
employees of the company. Thus, if they are members of the company, they shall be counted,
however, if a director is also employed by the company in another capacity, for example, as
Works Manager, Sales Manager or as the Company Secretary, he may be treated as employee
of the company notwithstanding his directorship. He will not then be counted towards the
maximum number of members.

 Restriction in inviting public to subscribe for securities:

The articles of a private company must prohibit an invitation to the public to subscribe for
any shares, debentures, or any securities of the company. In practical terms, this requirement
shall mean that a private company must not make public issue or publish any advertisement
inviting investments or resort to any other method of inviting public investment in its shares,
debentures, or any other security. A private company can only collect its capital through a
‘private approach'. ‘Private approach’ shall mean giving opportunity of investment to the
person approached and not to others14.

Other Requirements relating to Private Company:

1. There should be at least two persons to form a private company. As per section 3 (1),
a private company may be formed for any lawful purpose by two or more persons, by
subscribing their names to a memorandum and complying with the requirements of
this Act in respect of registration. Section 149(1) further lays down that a private
company shall have a minimum number of two directors. The only two members may
also be the two directors of the private company.

2. The words ‘private limited’ or an abbreviation thereof, such as ‘Pvt. Ltd.’ must be
added at the end of the name of a private limited company15.

14
“Taxmann’s”, “Company Law And Practise”, 23rd Edition 2018( Pg no-32)
15
“Taxmann’s”, “Company Law And Practise”, 23rd Edition 2018( Pg no-33)

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Advantages of Private Company:

A private company is easy to form than a public company. Only two members are sufficient
to form a private company.

2. It can start its business immediately after incorporation. Certificate to commence business
is not required to be obtained, which is compulsory for a public company.

3. It may pay remuneration to directors and managerial personnel or appoint any one to the
office of profits without any restrictions.

4. As no outsiders are its shareholders it is not required to hold a statutory meeting or file a
statutory report.

5. It may give loan to directors without obtaining consent or approval of the Central
Government.

6. There is a greater flexibility in regard to the management and conduct of the business than
in the public company.

7. The control and management is generally in the hands of capital owners, which is not the
case with public company.

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Special privileges and exemptions available to private company:

A private company enjoys certain privileges and exemptions from certain provisions of the
Companies Act. The basic reason for granting these privileges and exemptions is that the
private companies by restricting their membership to not more than 200 and because of
prohibition on public subscription to shares or debentures or deposits do not involve the
public money. Hence less public accountability and as such it need not be subject to such
rigorous surveillance as a public company is required to be. However, a private company
shall lose these privileges and exemptions when it fails to abide by the restrictive clause of
section 2(68) whether directly or indirectly16.

The following privileges and exemptions are available to a private company:

1. Minimum number of members: A minimum of two persons (as against seven

persons in the case of public company) may form a private company.[section 3]

2. Minimum number of Directors: A private company need not have more than two
directors as against minimum three in the case of a public company [Section 149].

3. Quorum for general meetings: Unless Articles provide for a higher number
quorum required for the general meeting of the shareholders in the case of, a private
company is 2 members personally present as against 5, 15 or 30 members personally
present depending upon the number of members as on the date of meeting being up to
1000, 5000 or more than 5000; in case of a public company (Section 103).

4. Managerial Remuneration: A private company is exempted from the provisions of

section 197 which fixes the overall limit to the managerial remuneration at 11 per
cent of net profits. Thus, a private company may remunerate its managerial personnel
by such higher percentage of profits, or in any manner, as it may deem fit [Section
197].

5. Rotational Retirement of directors: All directors of a private company can

be non-rotational directors [Section 152]. However, it does not mean that they cannot
be removed throughout their life or life of the company or before the expiry of the
period.

6. Filling casual vacancies: The provisions relating to manner of filling of

casual vacancies among directors and the duration of the period of office of those so
appointed do not apply to a private company [Section 161].

7. Special disqualifications: A private company may, by its articles of association,

provide special disqualifications for appointment of directors in addition to those
contained in section 164 (l & 2) [Section 164(3)].

16
“Taxmann’s”, “Company Law And Practise”, 23rd Edition 2018( Pg no-33-34)

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 8. Restrictions on number of directorships: No person can be a director in more than
10 public companies whereas he can become a director in maximum 20 private
companies provided none of those companies is a public company or a holding or
subsidiary of a public company [Section 165].

9. Independent directors: A private company is exempted from the requirement of

appointment of independent director [section 149].

10. Audit Committee: A private company is not required to constitute audit committee
of the Board [Section 177].

11. Voting rights and kinds of share capital: Under section 43, a private company may
issue shares other than equity or preference shares, if so provided in its Memorandum
or Articles of Association.

12.Further issue of shares: In case of rights issue under section 62, as

against minimum period of 15 days, a private company may close its offer of rights
issue before that. In other words, it need not keep its rights issue open for minimum
period of 15 days. [Vide MCA Notification dated 5-6-2015]

13.ESOPs: For issue of shares to its employees under Employee’s Stock Option
Scheme, a private company may pass an ordinary resolution as against special
resolution. [Vide MCA Notification dated 5-6-2015]

Additional Privileges and Exemptions17:

14.Loan for purchase of its own securities: A private company may provide loans for
purchase of its own shares provided the following conditions are satisfied:

(a) No other body corporate should have invested any money;

(b) Borrowing from banks, FIIs or bodies corporate should be less than double of its
paid up capital or Rs. 50 crore, whichever is lower;

(c) The private company should not have defaulted in repayment of borrowings as
may be existing on the date of the transaction.

15.Exemption from filing Board resolutions: A private company has been exempted
from filing resolutions of the Board of directors with the Registrar of Companies.

16.Loans to directors: A private company may give a loan or provide guarantee

or offer a security in connection with a loan taken by a director provided:
(a) No other body corporate should have invested any money in the

17
“Taxmann’s”, “Company Law And Practise”, 23rd Edition 2018( Pg no-35-36)

17 | P a g e
 lending/guaranteeing;

(b) Borrowing from banks, financial institutions or bodies corporate should be less
than double of its net worth or Rs.50crore, whichever is lower;

(c) The lending company should not have defaulted in repayment of borrowings.

17.Relaxation of ceiling on company audits: The ceiling of 20 audits under

section 141 will not include private companies having a paid-up share capital>100
crores.

18. Participation of interested director in Board meeting: Under section 184, an

interested director of a private company can participate in the Board meeting after
declaring his interest.

19.Provisions relating to directors: Provisions of sections 160, 162 and 180 relating to
appointment and restrictions on the powers of directors shall not apply to private
companies.

20.General body meetings: Provisions of sections 101 to 107 and section 109 relating
to general body meetings shall not apply to a private company if Articles of the
company provide otherwise.

21.Deposits from Members: Private companies have been allowed to accept deposits
from members under section 73 up to 10096 of its paid up capital and free reserves
provided they inform ROC in the prescribed manner.

22.Signing of Annual return: In case of a private company which is a start-up,

annual return shall be signed by the director of the company in case the company
does not have a company secretary.

23.Meetings of the Board: A private company which is a start-up may hold only one
meeting of the Board in each half of the calendar year provided the gap between the
two meetings is not less than ninety days.

24.Interested director: An interested director shall be counted towards the quorum for
a board meeting.

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PRIVATE COMPANY CAN BE

i. One person company

ii. Small company
 ONE PERSON COMPANY:[Section 2(62)]

The Companies Act, 2013 has, for the first time, allowed formation of a limited liability
company by just one person. In India, in the year 2005, the JJ Irani Expert Committee
recommended the formation of OPC. It had suggested that such an entity may be provided
with a simpler legal regime through exemptions so that the small entrepreneur is not
compelled to devote considerable time, energy and resources on complex legal compliance.
OPC is a one shareholder corporate entity, where legal and financial liability is limited to the
company only.

The Companies Act, 2013 classifies companies on the basis of their number of members into
One Person Company, private company and public company. As stated above, a private
company requires a minimum of 2 members. In other words, a One Person Company is a
kind of private company having only one member. As per section 2(62) of the Companies
Act, 2013, “One Person Company” means a company which has only one person as a
member. Section 3(1)(c) lays down that a company may be formed for any lawful purpose by
one person, where the company to be formed is to be One Person Company that is to say, a
private company. In other words, one person company is a kind of private company. A One
person company shall have a minimum of one director. Therefore, a One Person Company
will be registered as a private company with one member and one director. By virtue of
section 3(2), an OPC may be formed either as a company limited by shares or a company
limited by guarantee; or an unlimited liability company. In the case of OPC one nominee is to
be appointed at the time of formation of OPC18.The total paid up share capital must not
exceed 50 lakh and annual average turnover of 3 consecutive years must not be more than 2
crores.

Relaxations given to an OPC include:

1. There is no need to prepare a cash-flow statement [Section 2(40)].

2. The annual return can be signed by the Director and not necessarily a Company
Secretary (Section 92).The Central Government may prescribe an abridged annual
return for OPC.
3. There is no necessity for an Annual General Meeting (AGM) to be held
(Section 96).
4. Specific provisions related to general meetings and extraordinary general
meetings would not apply (sections 100 to 111).
5. Compliance can be said to have been done if the resolutions are entered in
the minutes’ book of the company (Section 122).
6. It would suffice if one director signs the audited financial statements(Section 134)

18
www.legalbites.in

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 7. Financial statements can be filed within 6 months from the close of the financial year
as against 30 days (Section 137).

8. An OPC need to hold only one meeting of the Board of Directors in each half
of a calendar year and the gap between the two meetings should not be less than
ninety days (Section 173).

 SMALL COMPANY:

Small company is a new form of private company under the Companies Act, 2013. A classification of
a private company into a small company is based on its size i.e. paid up capital and turnover. In other
words, such companies are small sized private companies. As per section 2(85) ‘‘small company’’
means a company, other than a public company,—

(i) paid-up share capital of which does not exceed fifty lakh rupees or such higher amount as may be
prescribed which shall not be more than five crore rupees; or

(ii) turnover of which as per its last profit and loss account does not exceed two crore rupees
or such higher amount as may be prescribed which shall not be more than twenty crore
rupees:

Provided that nothing in this definition shall apply to—

(A) holding company or a subsidiary company;

(B) Company registered under section 8; or

(C) Company or body corporate governed by any special Act19;

19
http.//bba.law.in

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 II. PUBLIC COMPANY: [Section 2(71)]
Section 2(71) of the Companies Act, 2013 define a public company to mean a company
which is not a private company. A public company is a corporation whose ownership is open
to the public. In other words, anyone can buy the shares of a public company. There are no
restrictions to the number of members of a public company or to the transferability of shares.
However, there are some other restrictions:
 (In UK) A public limited company should have at least 2 shareholders and 2 directors,
have allotted shares to the total value of at least £50,000, are registered with company
house, and have a qualified company secretary.
 (In India) A public company should have at least 7 members and 3 directors, and issue a
prospectus or file a statement in lieu of prospectus with the Registrar before allotting
shares.

By virtue of Section 2(71), a public company means a company which:

(a) is not a private company;
(b) has a minimum paid-up share capital of five lakh rupees or such higher paid-up capital,
as may be prescribed.

Provided that a company which is a subsidiary of a company, not being a private company, shall be
deemed to be public company for the purposes of this Act even where such subsidiary company
continues to be a private company in its articles.20

Other requirements of public company21:

 As per section 3 (1) (a), a public company may be formed for any lawful purpose by
seven or more persons, by subscribing their names or his name to a memorandum and
complying with the requirements of this Act in respect of registration.
 A public company may be said to be an association consisting of not less than 7
members, which is registered under the Act. In principle, any member of the public
who is willing to pay the price may acquire shares in or debentures of it. The
securities of a public company may be quoted on a Stock Exchange. The number of
members is not limited to two hundred. It may be noted that in case of a public
company, the articles do not contain the restrictions provided in Sections 2(68) of the
Act.
 As per section 58(2), the securities or other interest of any member in a public
company shall be freely transferable. However, any contract or arrangement between

20
Taxmann’s”, “Company Law And Practise”, 23rd Edition 2018( Pg no-39)
21
www.mca.gov.in

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 two or more persons in respect of transfer of securities shall be enforceable as a
contract.
 The concept of free transferability of shares in public and private companies is very
succinctly discussed in the case of Western Maharashtra Development Corpn. Ltd. V.
Bajaj Auto Ltd [2010] 154 Com Cases 593 (Bom). It was held that the Companies
Act, makes a clear distinction in regard to the transferability of shares relating to
private and public companies. By definition, a “private company” is a company which
restricts the right to transfer its shares. In the case of a public company, the Act
provides that the shares or debentures and any interest therein, of a company, shall be
freely transferable.
 The provision contained in the law for the free transferability of shares in a public
company is founded on the principle that members of the public must have the
freedom to purchase and, every shareholder the freedom to transfer. The incorporation
of a company in the public, as distinguished from the private, realm leads to specific
consequences and the imposition of obligations envisaged in law. Those who promote
and manage public companies assume those obligations. Corresponding to those
obligations are rights, which the law recognizes as inherent in the members of the
 The provision contained in the law for the free transferability of shares in a public
company is founded on the principle that members of the public must have the
freedom to purchase and, every shareholder the freedom to transfer. The incorporation
of a company in the public, as distinguished from the private, realm leads to specific
consequences and the imposition of obligations envisaged in law. Those who promote
and manage public companies assume those obligations. Corresponding to those
obligations are rights, which the law recognizes as inherent in the members of the
public who subscribe to shares.

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Advantages of Public Limited Company:

1. Raising capital through Public issue of shares: The most obvious advantage of being
a public limited company is the ability to raise share capital, particularly where the company
is listed on a recognized exchange.
2. Widening the shareholder base and spreading risk: As well as share capital, a public
limited company will often find itself in a better position when looking at other potential
sources of finance.
3. Growth and expansion opportunities: The value and chances of being able to raise
finance is in how it can be employed to serve the business. By having more finance
potentially more readily available and on better terms than a private company, the public
limited company can be in an advantageous position to:
(i) Pursue or gain new projects, new products or new markets

(ii) Grow capital expenditure to support and enhance the business

(iii) Make acquisitions (whether in cash or by offering shares to the shareholders of the target
business)

(iv) Acquire funds for research and development

(v) Pay off existing debt (or replace existing debt with new debt on better terms)

4. Exit Strategy: Going public can enhance the options for the founders to exit the business
at some point in the future, if they wish to do so. Both higher transferability of shares and the
increased visibility of the business and its performance may increase the chances of bid
interest from potential suitors.

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COMPARISON BETWEEN PRIVATE COMPANY AND PUBLIC
COMPANY:
Following are the main points of distinction between a private company and a public
company22:

1) Minimum Number of Members [Section 3]: 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) Maximum Number of Members: In case of private company the maximum

number must not exceed two hundred whereas there is no such restriction on the
maximum number of members in the case of public company.

3) Transferability of Shares [Section 44]: As per section 44, the shares of any member in
a company shall be movable property transferable in the manner provided by the
articles of the company. In a private company, by its very definition, articles of a
private company have to contain restrictions on transferability of shares.

4) Prospectus [Section 2(68)]: A private company cannot issue a prospectus, while a

public company may, through prospectus; invite the general public to subscribe for its
securities.

5) Minimum number of directors [Section 149]: A private company must have at least
two directors, whereas a public company must have at least three directors.

6) Retirement of Directors [Section 152]: Directors of a private company are not

required to retire by rotation, but in case of a public company at least 2/3rds of the
directors must be such whose period of office is subject to retirement by rotation.

7) Quorum for General Meetings [Section 103]: Unless the articles of the company
provide for a larger number, in case of a public company, the quorum shall be

(i) five members personally present if the number of members as on the date of
meeting is not more than one thousand;

(ii) fifteen members personally present if the number of members as on the date of
meeting is more than one thousand but up to five thousand;

(iii) thirty members personally present if the number of members as on the date of the
meeting exceeds five thousand.

In the case of a private company, unless articles provide for a higher number, two
members personally present, shall be the quorum for a meeting of the company.

8. Managerial Remuneration [Section 197]: In a private company, there are no

22
Taxmann’s”, “Company Law And Practise”, 23rd Edition 2018( Pg no-40)

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 restrictions on managerial remuneration, but in the case of a public company total
managerial remuneration cannot exceed 11 per cent of the net profits. The
remuneration payable to each managing/whole time director or manager cannot
exceed 5 per cent of the net profits unless approval of the Central Government has
been taken. Likewise, there are restrictions on the remuneration payable to ordinary
directorsalso.

9. Public Deposits: A public company is free to accept deposits from the public. A
private company cannot accept deposits from the public.

CONVERSION OF A PUBLIC COMPANY INTO A PRIVATE COMPANY :

As per section 14, the following steps shall be necessary for conversion of a private company
into a public company:

1) Special Resolution: A private company may convert itself into a public company by
amending its Articles of association. Section 14 of Companies Act, 2013, in this
regard, provides that at a private company can amend its Articles for the purpose by
passing a special resolution Thus, where a special resolution is passed thereby
deleting the statutory requirements as laid down in section 2(68) of the Act which
make a company a private company, a private company can become a public
company. So, where Articles of a private company are amended to raise its
membership beyond 200; or permitting free transferability of shares; or to extend
invitation to public to subscribe to its shares or debentures or any other security, it
becomes a public company with effect from the date of such alteration. As a
consequence, the company shall cease to enjoy the privileges and exemptions
conferred on a private company and the provisions of the Companies Act shall apply
to it as if it were a public company.
2) Increase in membership: If the number of members isless than seven, it must be
raised to not less than seven [Section 3].
3) Increase in number of directors: 1f the number of directors less than three, it must be
raised to not less than three [Section 149].
4) Filing of Altered Articles: Every alteration of the articles under this section shall be
filled with the Registrar 1n Form No. INC. 27, together with a printed copy of the
altered articles, within a period of fifteen days in such manner as may be prescribed
who shall register the same.
5) Alteration to be noted in every copy: Every alteration made in the articles of a
company shall be noted in every copy of the articles23 [Section 15(1)].

23
Taxmann’s”, “Company Law And Practise”, 23rd Edition 2018( Pg no-41)

25 | P a g e
Conversion of a public company into a private company

For conversion of a public company into a private company, section 14 of the Companies
Act, 2013 provides as follows:

1) Passing of a Special Resolution: Special resolution at a general meeting of

shareholders should be passed out authorizing the conversion of public company into
a private company and altering the articles so as to contain the
matters Specified in section 2( 68), ,namely the three restrictive clauses providing for
limiting the total number of members to 200; restricting free transferability of shares
and prohibiting invitation to public for subscription of its shares, debentures or any
other security.
2) Changing the name of the company: Company's name ought to be changed by,
adding the word ‘Private’ before the word limited. As per section 13, it does not
require special resolution to be passed.
3) Obtaining the approval of the Tribunal: Second proviso to section 14(1) provides that
no alteration made in the articles which has the effect of converting a public company
into a private company shall have effect unless such alteration has been approved by
the Tribunal which shall make such order as it may deem fit.
4) Filing with the Registrar: Every alteration of the articles and a copy of the order of
the Tribunal approving the alteration as per sub-section (1) shall be filed with the
Registrar, together with a printed copy of the altered articles, within a period of 15
days from the date of the receipt of the order from the Tribunal in the prescribed
manner and the Registrar shall register the same [Section 14(2)].24

24
Taxmann’s”, “Company Law And Practise”, 23rd Edition 2018( Pg no-42)

26 | P a g e
CONCLUSION:
Company may be defined as group of persons associated together to achieve some common
objective. A company formed and registered under the Companies Act has certain special
features, which reveal the nature of a company. These characteristics are also called the
advantages of a company because as compared with other business organizations, these are in
fact, beneficial for a company. Companies can be classified into six categories according to
the mode of incorporation on the basis of number of members, on the basis of control, on the
basis of ownership, on the basis of liability and on the basis of nationality of the company.

From the above discussion, it is evident that there are many differences between Private
Company and Public Company. The Companies Act defines the rules and laws that the
companies should follow. The private limited company has less restriction as compared to
public company as government interference is there. More regulatory requirements: To help
protect shareholders, the legal and regulatory requirements for a public limited company are
more onerous or troublesome than for private limited companies. For example, additional
restrictions include: A trading certificate must be obtained from Companies House before the
company can trade (there is no such requirement for a private company. The need to have at
least two directors is required in public company (only one is required in a private company).
More onerous and difficult rules applied for concerning loans to director. A suitably qualified
company secretary must be appointed. As well as higher transparency around accounts, they
must be produced within 6 months of the end of the financial year (9 months for private
companies). AGMs must be held, whereas in a private company decisions can more often be
made by resolution.

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BIBILIOGRAPHY:

Books:
 Taxmann’s”, “Company Law And Practise”, 23rd Edition 2018.

 “Avatar Singh”, Company Law, Eastern Book Company, 16th

edition.

Websites:

 www.legalindia.in
 www.company-formation.co.in
 www.company-formation.co.in
 www.legalbites.in
 www.mca.gov.in
 https://www.feedough.com/

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