Public Limited Company

Public Limited Company

What is public limited company?

A public company, also known as a public limited company (PLC) in some regions, is a type of business entity whose ownership is divided into shares of stock that are available for purchase by the general public and are typically traded on a stock exchange. Public Limited companies are subject to regulatory requirements, including financial disclosure and reporting, and they offer shares to raise capital from a wide range of investors. Shareholders of public limited companies have limited liability, and the company’s financial information is made publicly available.

Features of a public limited company

Public limited company have various features like share ownership, listing on stock exchanges, and many more. They are explained below:

1. Share Ownership

A public limited company ownership structure is characterized by the division of ownership into shares of stock. These shares are available for purchase by the general public, institutional investors, and other entities. Shareholders in a public limited company hold a fractional ownership interest in the company, and the extent of their ownership is determined by the number of shares they hold. This share-based ownership model allows for the widespread distribution of ownership, with numerous shareholders having a stake in the company’s performance and success.

2. Listing on Stock Exchanges

Public limited companies seek to increase the accessibility of their shares by listing them on recognized stock exchanges. Listing on stock exchanges, such as the Bombay Stock Exchange (BSE) or the National Stock Exchange (NSE), facilitates the public trading of the company shares. This process provides shareholders with a platform to buy and sell shares in the open market, enhancing liquidity. The ability to trade shares freely on these exchanges is a fundamental feature of public limited companies, enabling investors to convert their investments into cash quickly and efficiently.

3. Limited Liability

One of the advantages of being a shareholder in a public limited company is the concept of limited liability. Shareholders enjoy protection for their personal assets, as their financial liability is generally confined to the amount they have invested in the company shares. In the event of the public company facing financial difficulties or obligations, shareholder’s personal assets are shielded from potential claims and losses. This limited liability feature is a fundamental aspect of public limited companies and encourages investors to participate in the financial markets with confidence.

4. Access to Capital Markets

One of the best advantages of being a public limited company is the access to capital markets. By issuing additional shares to the public, these companies can raise capital to fuel various aspects of their business. This capital can be utilized for purposes such as expansion, research and development, debt repayment, or strategic acquisitions. Access to capital markets allows public limited companies to tap into a broad pool of investors, making it easier for them to secure substantial funds for their growth and operational needs, providing a competitive edge in the business world.

5. Corporate Governance

Public limited companies typically maintain Strong corporate governance structures. These structures include boards of directors responsible for overseeing the company management and decision-making processes. The board of directors represents the interests of shareholders and ensures that the public company operates in a manner that maximizes shareholder value. Corporate governance practices aim to ensure transparency, ethical conduct, and accountability. They provide a framework for setting company policies, defining executive compensation, and making strategic decisions. A well-structured corporate governance system is essential for instilling investor confidence, fostering long-term success, and upholding ethical business practices.

6. Corporate Structure

Public limited companies often feature complex corporate structures. They may issue multiple classes of shares, each with distinct rights and privileges, allowing for flexibility in ownership and control. These public companies frequently have a diverse shareholder base that can include individuals, institutional investors, and employees. This diversity in ownership can provide unique challenges and opportunities, requiring effective management and communication. Public limited companies aim to maximize shareholder value through efficient corporate structures that align with the public company objectives. Their structure can adapt and evolve over time to meet changing business needs and market dynamics while maintaining a focus on creating value for their shareholders.

Type of public limited company

A public limited company can be broadly categorized into two main parts based on the status of its shares in relation to the stock exchange. The first part encompasses those public companies that have taken the step to list their shares on a recognized stock exchange, making them available for trading by the general public and institutional investors. These publicly traded companies adhere to stringent regulatory and disclosure requirements to provide transparency to their shareholders and the wider market.

On the other hand, the second part comprises public companies that have not chosen to list their shares on a stock exchange. These companies remain privately held, and their shares are not available for trading on the open market. They may still have a significant number of shareholders and operate as public companies in many respects, but do not have the same level of liquidity and regulatory obligations as their publicly traded counterparts. Each part represents a distinct approach to corporate ownership and financial market participation within the realm of public companies.

Advantages of public limited company

Public limited company advantages are access to capital, liquidity for shareholders, and many more. They are explained below:

1. Access to Capital

Public companies have a distinct advantage in accessing capital. By issuing shares to the public, they can secure substantial funds for growth, investments, and financial requirements. This broader access to capital markets makes it easier to raise substantial amounts compared to private limited companies. The ability to attract a wide range of investors provides a competitive edge in financing expansion and pursuing strategic opportunities.

2. Liquidity for Shareholders

Publicly traded shares offer shareholders liquidity, enabling them to buy and sell their investments easily on stock exchanges. This liquidity creates flexibility, allowing investors to convert their holdings into cash as needed. Unlike private limited company shareholders, who may face restrictions on selling their shares, public limited company shareholders can readily trade their holdings in the open market, providing an exit strategy and access to cash.

3. Enhanced Visibility and Credibility

The status of being a publicly traded company often enhances visibility and credibility. Public limited company attract the attention of analysts, institutional investors, and potential business partners, leading to a broader array of growth opportunities. The increased exposure and recognition in the investment community can contribute to the company’s growth and solidify its reputation in the business world.

4. Stock-Based Incentives  

Public limited companies can leverage stock options and grants as incentives for employees. This aligns employee’s interests with those of shareholders, motivating them to contribute to the company’s long-term success. Stock-based incentives can help attract and retain top talent, as employees become direct stakeholders in the company’s performance and benefit from stock price appreciation, fostering a culture of dedication and commitment.

5. Valuation Benchmark

Public limited company enjoy the advantage of a publicly traded stock price, which serves as a clear valuation benchmark. This established market value assists in attracting investment and determining the company’s worth. Potential investors can make informed decisions based on the company’s stock price, providing a transparent valuation that helps the company communicate its value to the market. This clarity in valuation supports growth, strategic decisions, and capital-raising efforts.

Disadvantages of public limited company

Disadvantages of public limited company are regulatory burden, pressure for results, and many more. They are explained below:

1. Regulatory Burden

   Public limited companies face a significant regulatory burden. They must adhere to complex and strict regulatory requirements, including extensive financial reporting, disclosure, and transparency standards. Compliance with these regulations can be time-consuming, costly, and demanding, diverting resources and attention from core business activities.

2. Pressure for Results

   Public limited company often experience pressure to deliver strong quarterly results to satisfy shareholders and financial markets. This priority on short-term performance can hinder the pursuit of long-term strategic objectives, as management may prioritize immediate financial goals over sustainable growth and innovation.

3. Risk

Public limited company are exposed to the risk of hostile takeovers, where external entities or investors acquire a significant stake in the company without board approval. This vulnerability can lead to changes in leadership or strategy that may not align with the company’s long-term vision, affecting corporate stability and direction.

4. Shareholder Activism

 Public limited company are liable to shareholder activism, where influential shareholders push for changes in the company’s operations, governance, or strategy. While shareholder activism can be beneficial in some cases, it can also disrupt business operations and divert management’s attention from executing the company’s strategic vision.

5. Market Volatility

 The shares of public limited company are subject to market volatility, which can result in significant price fluctuations. This volatility can impact the company’s market capitalization, investor confidence, and the overall value of shareholders’ investments. Sudden stock price swings can be challenging to manage and may affect the company’s ability to attract and retain investors.

Basic need for public limited company

When establishing a public limited company, the process is governed by specific rules and regulations under the Company Act. To successfully register a public limited company, the following key considerations should be taken into account:

Shareholders and Directors: A minimum of seven shareholders and three directors are required to initiate the formation of a public limited company.

Authorized Share Capital: The company must have a minimum authorized share capital of Rs. 1 lakh as per the 1956 Company Act, but as per the current Company Act 2013, the requirement of authorized capital is nil.

Digital Signature Certificate (DSC): At least one of the directors must possess a Digital Signature Certificate (DSC). Additionally, self-attested copies of identity and address proof should be submitted.

Director Identification Number (DIN): Directors of the proposed company must obtain a Director Identification Number (DIN).

Company Name: The chosen name for the company must comply with the provisions outlined in the Company Act and Rules.

Documentation: Essential documents, including the Memorandum of Association (MOA), Articles of Association (AOA), and a duly filled Form DIR – 12, must be prepared and submitted.

Registration Fees: The prescribed registration fees must be paid to the Registrar of Companies (ROC) to complete the registration process.

When to choose public limited company

Before registration of public limited company you must have knowledge of this 5 important points. They are as given below:

1. Access to Capital

Many businesses require substantial capital for growth, expansion, acquisitions, or debt reduction. Going public offers access to a diverse pool of investors and provides a more effective means of raising funds. Public limited company can secure significant capital through the sale of shares on stock exchanges, enabling them to pursue ambitious strategic objectives.

2. Growth Opportunities

Public limited company benefit from heightened visibility and credibility, which attracts larger investments and opens up numerous growth opportunities. Enhanced market recognition and access to a broader investor base facilitate expansion, innovation, and market share growth, making it a compelling choice for businesses with aggressive growth ambitions.

3. Ownership Transition

Business owners and founder often consider going public as part of an exit or succession plan. This transition allows them to sell their shares to the public, monetizing their ownership stakes and providing an exit strategy while ensuring the business continues to operate.

4. Liquidity for Existing Shareholders

Existing shareholders, including founders and early investors, may wish to have the option of selling their shares on the open market, providing liquidity for their investments. Going public offers an avenue for shareholders to monetize their holdings, offering flexibility and financial freedom.

5. Acquisition Currency

Public limited company use their publicly traded shares as a currency for mergers and acquisitions. This eases the process of engaging in strategic partnerships and expanding business operations through acquisitions. Publicly traded stock serves as a valuable currency for negotiations and allows companies to access a wider range of potential targets for growth and diversification.

Important Documents for Private Limited Company

Various documents required for private limited company. They are given below:

1. Proof of Identity: All shareholders and directors must provide proof of their identity.

2. Proof of Address: Directors and shareholders need to furnish proof of their residential addresses.

3. PAN Number: PAN numbers are required for all directors and shareholders.

4. Utility Bill: A utility bill for the proposed office, which is the intended registered office of the company, should be provided.

5. NOC from Landlord: A No Objection Certificate from the landlord of the office premises is essential.

6. Director Identification Number (DIN): Each director must possess a Director Identification Number (DIN).

7. Digital Signature Certificate (DSC): Directors are required to have a Digital Signature Certificate (DSC).

8. Memorandum of Association (MOA): The Memorandum of Association needs to be prepared and submitted.

9. Articles of Association (AOA): The Articles of Association must also be prepared and submitted.

Steps required to registered public limited company

Following are the steps taken for registered a public limited company. They are given below:

Step 1: Obtain a Digital Signature Certificate (DSC)

  • A Digital Signature Certificate DSC is essential for filing online registration forms on the MCA portal.
  • All proposed directors and memorandum/articles of association subscribers must possess a DSC.

Step 2: Obtain Director Identification Number (DIN)

  • A Director Identification Number (DIN) is a unique identification number for directors.
  • Individuals intending to become company directors must obtain a DIN.
  • DIN, along with the director’s name and address proof, must be included in the company registration form.

Step 3: Register on the MCA Portal

  • Complete the SPICe+ form and submit it on the MCA portal to initiate the company registration process.
  • The company director needs to register on the MCA portal to access the necessary services.
  • This registration allows for the submission of e-forms and access to public documents.

Step 4: Certificate of Incorporation

  • The Registrar of Companies (ROC) reviews the registration application along with the provided documents.
  • After successful verification, the ROC issues the Certificate of Incorporation for the Public Limited Company.
  • Subsequently, the company should apply for the ‘Certificate of Business Commencement.

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