Distinguishing Private and Public Companies under the Companies Act, 2013

The Companies Act, 2013 (the Act) in India governs the formation, operation, and winding up of
companies. It differentiates between private and public companies based on ownership structure,
regulations, and access to capital. Here's a detailed breakdown of their key differences:

1. Minimum Number of Members (Section 2(68) & Section 3(1))

 Private Company: Requires a minimum of two members and a maximum of 200

members (excluding nominees or employees who hold shares in trust for the company).

 Public Company: Requires a minimum of seven members and no upper limit on the number of
members. This allows for a broader ownership base.

2. Invitation to Subscribe for Shares (Section 2(68) & Section 3(1))

 Private Company: Cannot invite the general public to subscribe for its shares. Shares are
typically offered to a closed group of investors like family, friends, or venture capitalists.

 Public Company: Can invite the general public to subscribe for its shares through a prospectus.
This prospectus is a detailed document outlining the company's financials, risks, and future
plans.

3. Transferability of Shares (Section 18 & Section 61)

 Private Company: The Act allows private companies to restrict the transferability of their shares
through provisions in their Articles of Association (AoA). This ensures control remains with a
specific group.

 Public Company: Shares are freely transferable, subject to any restrictions in the
company's Memorandum of Association (MoA). This facilitates easy entry and exit for investors.

4. Listing of Shares (Section 2(71) & various regulations)

 Private Company: Shares are not listed on any stock exchange. They are traded privately
amongst existing shareholders or through negotiated deals.

 Public Company: Shares can be listed on a recognized stock exchange like the National Stock
Exchange (NSE) or the Bombay Stock Exchange (BSE). This allows public participation and easier
access to capital.

5. Minimum Paid-up Capital (Section 3(2))

 Private Company: Requires a minimum paid-up share capital of ₹1 lakh (INR 100,000).

 Public Company: Requires a minimum paid-up share capital of ₹5 lakh (INR 500,000). This
higher threshold reflects the increased public scrutiny faced by public companies.

6. Commencement of Business Certificate (Section 18(1))

 Private Company: Can commence its business activities once it receives the Certificate of
Incorporation.
  Public Company: Needs to obtain a Commencement of Business Certificate in addition to the
Certificate of Incorporation. This ensures compliance with stricter regulations before public
interaction.

7. Requirement for Prospectus (Section 2(60) & Chapter II, Part IX)

 Private Company: Does not require a prospectus for issuing shares.

 Public Company: Must issue a prospectus if they intend to invite the public to subscribe for its
shares. The prospectus needs to be approved by the Securities and Exchange Board of India
(SEBI).

8. Restrictions on Deposits (Section 76)

 Private Company: Can accept deposits from its members, directors, and relatives to a limited
extent, subject to certain regulations.

 Public Company: Has stricter regulations regarding deposit acceptance. They need to comply
with specific credit ratings and maintain a higher reserve ratio.

9. Requirement for Managerial Remuneration Policy (Section 178)

 Private Company: Not mandated to have a formal Managerial Remuneration Policy.

 Public Company: Must have a Managerial Remuneration Policy approved by its shareholders,
outlining compensation packages for directors and key managerial personnel.

10. Requirement for Independent Directors (Section 149)

 Private Company: Not required to have Independent Directors on their board.

 Public Company: Listed public companies must have at least one-third of their directors as
independent directors. This promotes transparency and accountability.

11. Requirement for Board Meetings (Section 173)

 Private Company: Needs to hold board meetings at least once a quarter.

 Public Company: Needs to hold board meetings at least four times a year with a gap of not
more than three months between consecutive meetings.

12. Requirement for Annual General Meeting (AGM) (Section 96)

 Private Company: Needs to hold an AGM within six months from the end of the financial year.

 Public Company: Needs to hold an AGM within three months from the end of the financial year.
This tighter timeframe ensures timely reporting to shareholders.

13. Requirement for Financial Statements and Disclosures (Section 129 & 130)

 Private Company: Needs to prepare financial statements but has some flexibility in the level of
detail disclosed.
  Public Company: Needs to prepare financial statements in a specific format as prescribed by the
Act and disclose them publicly. This increased transparency allows investors to make informed
decisions.

14. Requirement for Audit (Section 139)

 Private Company: Can opt out of an audit if certain conditions are met, such as having a
turnover below a specified threshold and being a subsidiary of a listed company.

 Public Company: Must get their financial statements audited by a chartered accountant. This
independent audit ensures the accuracy and reliability of financial information.

15. Requirement for Secretarial Audit (Section 204)

 Private Company: Not mandated to have a secretarial audit.

 Public Company: Listed public companies with a paid-up capital of ₹10 crore or more need to
undergo a secretarial audit. This audit verifies compliance with corporate governance norms.

16. Conversion from Private to Public Company (Section 13)

 Process: A private company can convert to a public company by fulfilling specific requirements,
such as increasing its minimum number of members to seven, obtaining a commencement of
business certificate, and complying with listing regulations.

 Benefits: Allows access to a wider investor base, raises capital through public offerings, and
enhances company reputation.

17. Conversion from Public to Private Company (Section 14)

 Process: A public company can convert to a private company by following a prescribed

procedure, such as reducing its number of members to below 200 and delisting its shares from
the stock exchange.

 Reasons: May be desirable for greater control by a smaller group of shareholders or to avoid the
regulatory burden associated with being public.

18. Borrowing Powers (Section 292)

 Private Company: The Act doesn't impose specific restrictions on borrowing powers. However,
the company's Articles of Association (AoA) may contain limitations.

 Public Company: May have certain restrictions on borrowing based on their financial position
and creditworthiness. This helps maintain financial discipline.

19. Government Scrutiny (Various Sections)

 Private Company: Generally subject to less government scrutiny compared to public companies.

 Public Company: Due to their larger size, public interest, and potential impact on the market,
public companies face greater scrutiny from regulatory bodies like the Ministry of Corporate
Affairs (MCA) and SEBI.
20. Requirement for Compliance Officer (Section 204)

 Private Company: Not mandated to have a compliance officer.

 Public Company: Listed public companies with a paid-up capital of ₹5 crore or more need to
appoint a compliance officer. This officer ensures adherence to company law and listing
regulations.

21. Requirement for Investor Grievance Redressal Mechanism (Section 178)

 Private Company: Not required to have a formal investor grievance redressal mechanism.

 Public Company: Listed public companies need to establish a mechanism for addressing investor
grievances related to their shares or the company's operations.

22. Requirement for Corporate Social Responsibility (CSR) (Section 135)

 Private Company: Not mandated to undertake CSR activities unless their net profit exceeds a
specified threshold.

 Public Company: Certain public companies with a net profit exceeding a specific limit or a
turnover exceeding a threshold need to spend a percentage of their profits on CSR activities. This
promotes social responsibility and ethical business practices.

23. Dividend Distribution Policy (Section 2(22) & Section 122)

 Private Company: Has more flexibility in determining its dividend distribution policy. The AoA
may specify conditions for declaring and distributing dividends.

 Public Company: The Act and regulations may impose certain restrictions on dividend
distribution to ensure the company maintains sufficient financial reserves.