Abstract
This paper deals with the differentiation of private companies and public companies in the Companies Act, 2013 and its relevance for corporate law. The Companies Act, 2013 differentiates companies on the basis of their members, share transfers and public nature. This paper offers a comparative study of private companies and public companies with reference to their definition, corporate governance structure, mode of raising funds, compliance issues and corporate advantages. It further elaborates on the issue of deemed public companies under Section 2(71). The recent trends in regulation of listed companies under the SEBI regulations are discussed. This paper concludes that the distinction between private and public companies depends on the degree of accountability towards investors and public in general, but not on the legal status alone. Although private companies have more flexibility of operation, the public companies are still governed by strict corporate governance and disclosure norms.
Keywords: Companies Act, 2013; Private Company; Public Company; Corporate Governance; Capital Formation; Investor Protection; SEBI; Public Company; Private Company.
Introduction
The distinction between a private company and a public company is vital since it impacts capital formation, company governance, investor protection and compliance among others. A public company can mobilize capital from the public although with stringent laws while the opposite is true for private companies; hence the relevance of the distinction for capital formation, company governance, and investor protection among others.
The distinction is established under the Companies Act, 2013 through three distinct aspects including membership, transferability of shares and mobilization of public capital. Through these characteristics, a company is classified as either a private company or a public company under the law.
Definitions of the two categories are provided under Sections 2(68) and 2(71) which respectively define a private company and a public company.[1] These sections provide the statutory framework that enables one understand the rights and obligations associated with each category.
This paper will analyze the distinctions between private companies and public companies under the Companies Act, 2013. The analysis will be made on the basis of membership, company governance and mobilization of capital among others.
Statutory Definition of a Private Company
According to Section 2(68) of the Companies Act, 2013, a private company is a company that is subject to some statutory provisions which prevent the company from having widespread ownership.[2]
The following criteria should be fulfilled by a private company:
- Restriction on transfer of shares: The transfer of shares in the company is restricted. In other words, shareholders will not be able to freely sell or transfer their shares according to the terms of the company.
- Number of members up to 200: No more than 200 members are allowed in a private company. Neither present nor past employees who are members will be counted for this purpose, and joint holders of shares will be considered a single member.
- No public invitation: It is not possible for a private company to invite the general public to subscribe for its shares or other securities.
In the past, the minimum paid-up share capital of a private company had to be ₹1 lakh. This requirement has been abolished through the Companies (Amendment) Act, 2015.[3] In effect, therefore, a private company no longer needs to have any minimum paid-up share capital in order to come into existence.
All of the above features distinguish a private company from a public company in terms of its limited liability status, restricted share transfers, and inability to obtain funds from the general public.
Provisions:
- Section 2(68), Companies Act, 2013 – Definition of a Private Company.
- Section 2, Companies (Amendment) Act, 2015 – Omission of the minimum paid-up share capital requirement.
Statutory Definition of a Public Company
Section 2(71) of the Companies Act, 2013 provides that a public company means a company which is not a private company.[4] That is, if a company does not fulfill the requirements of being a private company as defined in Section 2(68), it shall be regarded as a public company.
The public company neither imposes restrictions on the transfer of its shares, nor limits the number of its members, and it is free to invite the general public to subscribe for its shares or other securities provided that the provisions of the Companies Act and the securities law are not violated.
One of the notable aspects of Section 2(71) is the proviso regarding subsidiaries of the public companies. Under the Companies (Amendment) Act, 2017 (effective from 9th February 2018), the subsidiary of a public company shall be deemed to be a public company regardless of whether the articles of association describe it as a private company.[5]
Relevant Provisions:
- Section 2(71), Companies Act, 2013 – Definition of a Public Company.
- Companies (Amendment) Act, 2017 – Proviso to Section 2(71) relating to subsidiaries of public companies (effective 9 February 2018).
Point-by-Point Comparison of Private Company with Public Company
- Number of Members
In a private company, the minimum number of members required is 2 and the maximum number of members is 200. In this calculation, the present as well as past employees who were members are not included, while joint holders are treated as one member only.In a public company, the minimum number of members required is 7, while the maximum number is unlimited.
- Minimum Number of Directors
Section 149 of the Companies Act, 2013 provides that a minimum of 2 directors are required in a private company, and 3 directors in a public company.[6] This is because a public company is relatively larger than a private company.
- Transferring of Shares
The shares in a private company cannot be transferred due to the restrictions provided for in the Articles of Association (AOA). This ensures that there is limited ownership in the shares.
On the other hand, shares in a public company have no restrictions on transfer as provided for by Section 58(2).[7]
- Invitation to the Public and Fund Raising
It is not possible for a private limited company to invite the public to subscribe to its shares or securities. It mainly raises the funds from the people who have membership in that company.
Public limited company raises its funds from the public through issue of shares using the method of prospectus. It can also list its securities in the recognised stock exchange. The listed public companies follow SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 and SEBI (Issue of Capital and Disclosure Requirements).
- Name of the Company As per Section 4(1)(a) of the Companies Act, 2013, it is mandatory for the name of a private company to be followed by the words “Private Limited” and that of a public company should be followed by the word “Limited”.[8]
- Minimum Paid-up Share Capital
Prior to that, the minimum paid-up share capital for a private company was ₹1 lakh, while that for a public company was ₹5 lakhs.[9]
However, the Companies (Amendment) Act of 2015 has made the above minimum paid-up share capital unnecessary. There is now no minimum paid-up share capital in case of both private and public companies.
- Compliance and Disclosure Requirements
There are many advantages of being a private limited company. According to the MCA Notification 5 June 2015, eligible private limited companies get exemption from specific requirements regarding related party transactions (Section 188), management remuneration (Sections 197 and 198), and certain other board meetings and procedure requirements.[10]
However, in comparison, public limited company should be governed by more stringent compliance and disclosure requirements. In case of a listed company, SEBI guidelines also have to be followed.
- Meeting & Quorum
It is mandatory for both private companies and public companies to conduct an Annual General Meeting (AGM) as per Section 96 of the Companies Act, 2013.[11]
However, there will be a difference in the minimum quorum rules as per Section 103. In case of a private company, the minimum quorum shall be two members personally present. In case of a public company, the quorum depends upon the number of members.
- Special Privileges
The private limited company enjoys more freedom in handling its internal affairs. This is due to the fact that it can introduce more restrictions through its Articles of Association in relation to share transfer and regulation of internal management.
Furthermore, small companies and OPCs enjoy more exemptions as per the Companies Act, 2013.
The public company enjoys few exemptions in comparison to the above since it is related to the public in terms of investments.
Deemed Public Companies and Uncertainty Cases
It is difficult to draw the line between a private company and a public company in certain cases. For instance, in the proviso to Section 2(71) of the Companies Act, 2013.
According to this proviso, if a private company is a subsidiary of a public company, it shall be considered a public company despite the fact that its Articles of Association refer to it as a private company.[12] Such a proviso was added to the Companies Act under the Companies (Amendment) Act, 2017 on 9 February 2018.[13]
This stipulation aims at ensuring that a public company does not evade additional legal obligations by doing business via a private subsidiary. Indeed, because the holding company must be responsible to the public stockholders, the subsidiary will be subject to the same regulation as a public company.
On the other hand, such a subsidiary can keep some elements of a private company in its Articles of Association unless such elements are in contradiction to the provisions of the Companies Act. Consequently, there emerges a grey zone where the company will be a public company according to the legislation, but, at the same time, it will have some features of a private company.
The relevance of the restrictions to the share transfers in private companies was pointed out by the Supreme Court of India in the case of Needle Industries (India) Ltd v Needle Industries Newey (India) Holding Ltd.[14] The court stated that the restrictions to share transfers is a distinctive element of private companies and should be interpreted in accordance with the Articles of Associations of the company and the law.
In sum, the above proviso proves that the legal nature of the company depends not only on the Articles of the company itself but also on the connection between it and its holding company.
Recent Regulatory Trends (2024–2025)
Recent trends reveal that there have been moves towards improved corporate regulation in India in terms of increased governance, disclosure, and protection of investors, particularly listed companies.[15] In 2024 and 2025, SEBI made additional improvements in the area of corporate governance by implementing changes in the regulations under the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (LODR). These reforms have been aimed at enhanced disclosures, increased responsibility of the company’s directors and management, and improved supervision of the related-party transactions (RPTs).
An additional recent trend in the area of the corporate regulation in India has been the introduction of the materiality threshold of the related-party transactions. Rather than depending on the fixed monetary threshold only, SEBI has moved to a more turnover-oriented system of assessment of whether a particular transaction is material or not.
It is evident from the above discussions that publicly listed firms are increasingly becoming more regulated in terms of governance practices. However, private firms still have relatively more freedom of operation with less number of compliance issues under the Companies Act, 2013. Therefore, it is clear that the concept of differentiating private firms and public firms is very significant due to the responsibilities of the latter.
Conclusion
The difference between a private and public company as per the Companies Act, 2013 is functional rather than formal in nature. The difference arises on the basis of the level of accountability that the company needs to have towards its shareholders and the outside world. While the public companies have relatively more freedom to raise money from the public, they are governed by stricter laws as far as governance and disclosure of information is concerned. On the other hand, the private companies have relatively more freedom due to the fact that they deal with a limited number of members. But recently there have been changes in the law wherein the governance of the larger private companies undergoing the process of bankruptcy or having an economic impact is becoming stringent.
References
[1] Companies Act 2013 ,ss 2(68),2(71).
[2] Companies Act 2013, s 2(68).
[3] Companies (Amendment) Act 2015, s 2.
[4] Companies Act 2013, s 2(71).
[5] Companies (Amendment) Act 2017, s 2.
[6] Companies Act 2013, s 149.
[7] Companies Act 2013, s 58(2).
[8] Companies Act 2013, s 4(1)(a).
[9] Companies (Amendment) Act 2015, s 2.
[10] Ministry of Corporate Affairs, Notification No GSR 464(E), 5 June 2015.
[11] Companies Act 2013, s 103.
[12] Companies Act 2013, s 2(71).
[13] Companies (Amendment) Act 2017, s 2.
[14] Needle Industries (India) Ltd v Needle Industries Newey (India) Holding Ltd (1981) 3 SCC 333.
[15] Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations 2015, reg23.
