Public Company, Concept, Meaning, Characteristics, Formations, Significance, Types, Advantages, Limitations and Key Differences Between Public Company and Private Company

Public Company is a business entity that is incorporated under the Companies Act, 2013 and is allowed to offer its shares and debentures to the general public. It is a separate legal entity with limited liability, and its ownership is distributed among public shareholders through the issuance of shares, which are often traded on recognized stock exchanges.

According to Section 2(71) of the Companies Act, a public company is one that:

• Is not a private company, and

• Has a minimum of 7 members (with no maximum limit), and

• May raise capital by inviting the public to subscribe to its securities.

Public companies are required to follow stringent legal and regulatory requirements, including public disclosures, auditing, and corporate governance norms. They are also mandated to hold annual general meetings and publish their financial statements for public inspection.

Examples of public companies include large corporations such as Tata Motors, Infosys, and Reliance Industries.

The primary advantage of a public company is its ability to raise large-scale capital, making it suitable for big infrastructure projects, manufacturing, and service industries. However, the structure also subjects it to public scrutiny, regulatory oversight, and the pressure to maximize shareholder value.

Meaning of Public Company

Public Company is a type of business organization that is incorporated under the Companies Act, 2013 and is permitted to offer its shares and debentures to the general public. Unlike a private company, a public company has no restriction on the maximum number of members, though it must have a minimum of seven shareholders and three directors.

Its shares are usually listed on recognized stock exchanges, allowing public trading, which facilitates raising large capital. A public company has a separate legal entity, offers limited liability to its shareholders, and is subject to strict regulatory compliances, including public disclosures, audits, and governance norms.

Examples include large corporations such as Infosys, State Bank of India, and Tata Steel.

A public company is ideal for large-scale enterprises that require extensive funding, public trust, and a transparent corporate structure.

Characteristics of Public Company:

• Separate Legal Entity

A public company is recognized as a separate legal entity distinct from its members. It can own property, incur debts, sue and be sued in its own name. The company continues to exist regardless of changes in ownership or the death of shareholders. This legal independence enhances operational credibility and allows for long-term strategic planning. The separate entity status ensures business continuity and reduces the legal risks for individual shareholders, supporting stable growth and institutional development.

• Limited Liability of Shareholders

In a public company, shareholders enjoy limited liability, which means their financial responsibility is restricted to the unpaid value of the shares they own. They are not personally liable for the company’s debts or losses. This characteristic encourages public investment, as individuals can invest without risking their personal assets. Limited liability is a fundamental feature that provides financial security to investors and promotes greater participation in corporate ownership, especially in large-scale industrial and commercial ventures.

• Minimum of Seven Members

A public company must have a minimum of seven members, with no upper limit on the number of shareholders. This wide ownership base allows for extensive capital mobilization through public share issues. The flexibility in membership supports scalability and inclusion of a diverse set of investors, including retail individuals, institutions, and foreign entities. This characteristic is crucial for funding large-scale business operations, infrastructure projects, or multinational ventures that require substantial investment and public confidence.

• Transferability of Shares

Shares of a public company are freely transferable, meaning shareholders can sell or buy shares on the open market without requiring company approval. This feature adds liquidity to the investment and encourages more people to invest, knowing they can easily exit if needed. Free transferability also enables price discovery through stock exchanges and reflects the market value of a company. This openness is a key reason public companies are attractive to investors and traders.

• Can Invite Public to Subscribe

A public company can issue a prospectus and invite the public to subscribe to its shares and debentures. This feature enables it to raise capital from a vast investor base. Public offerings, like IPOs, allow companies to finance expansion, R&D, and operations without relying solely on loans. The ability to access public funds also enhances the company’s creditworthiness and helps build brand visibility. It is one of the primary distinctions from private companies.

• Board of Directors and Corporate Governance

Public companies are managed by a Board of Directors, elected by the shareholders. They are required to follow strict corporate governance norms, including regular board meetings, audits, and shareholder communications. Independent directors, audit committees, and regulatory disclosures ensure transparency and accountability. These mechanisms aim to protect shareholder interests and promote ethical management. The governance framework enhances investor trust and regulatory compliance, which are essential for sustaining market reputation and business longevity.

• Regulatory Compliance and Disclosures

Public companies are subject to stringent regulatory compliance under the Companies Act, SEBI guidelines, and stock exchange regulations. They must file annual returns, publish financial statements, and disclose material events. These requirements ensure transparency and protect the interests of shareholders and stakeholders. While compliance increases operational costs, it also improves credibility and investor confidence. Regulatory oversight is essential for maintaining trust in the capital market and for ensuring fair and legal business practices.

• Perpetual Succession

Public company enjoys perpetual succession, meaning it continues to exist despite changes in ownership, death, or insolvency of shareholders. The legal identity of the company remains unaffected by internal member changes. This guarantees business continuity and supports long-term investments and contracts. Perpetual succession allows the company to function across generations, attract institutional funding, and create a sustainable corporate legacy. It also reinforces stakeholder confidence in the company’s enduring presence and reliability.

Formations of Public Company:

Formation of a public company is a comprehensive legal process governed by the Companies Act, 2013. It involves multiple stages, from idea conceptualization to obtaining the Certificate of Commencement of Business. A public company can offer its shares to the general public and is subject to stringent regulatory procedures. Below are the key stages involved in its formation:

1. Promotion Stage

This is the first stage where the business idea is conceived. A promoter or group of promoters undertake the necessary groundwork, such as identifying business opportunities, arranging capital, assembling the team, and conducting feasibility studies. The promoter also decides the company’s name, prepares key documents, and initiates the registration process.

2. Name Reservation

A unique name is selected for the company, which must end with “Limited” (not “Private Limited”). The name is reserved using the RUN (Reserve Unique Name) service on the Ministry of Corporate Affairs (MCA) portal. The name must not resemble any existing company and must comply with prescribed naming guidelines.

3. Digital Signature and DIN

Each proposed director must obtain:

• A Digital Signature Certificate (DSC) for signing online documents securely.

• A Director Identification Number (DIN), issued by the Registrar of Companies (RoC) through the SPICe+ form.

These are mandatory for legal recognition and communication.

4. Drafting of Charter Documents

Two foundational documents must be prepared:

• Memorandum of Association (MoA): Describes the company’s objectives, scope, and powers.

• Articles of Association (AoA): Lays out the internal rules, rights, and duties of members and directors.

These documents must be signed by at least seven subscribers (the minimum required members in a public company).

5. Filing Incorporation Documents

Using the SPICe+ (INC-32) integrated form on the MCA portal, the company applies for incorporation. The form includes:

• Details of company name, address, directors, and capital

• MoA and AoA

• PAN and TAN application

• Proof of registered office (e.g., rental agreement, utility bill, NOC)

• Affidavits and declarations by directors

The form is submitted with requisite government fees and stamp duty.

6. Certificate of Incorporation

Once the Registrar of Companies (RoC) verifies the application and documents, a Certificate of Incorporation (COI) is issued. This certificate confirms that the company is legally formed and registered. It includes the Corporate Identification Number (CIN), which is unique to every registered company.

7. Capital Raising and Prospectus Filing

Since public companies can raise funds from the public, they must prepare a prospectus, which is a formal document inviting the public to subscribe to shares or debentures. The prospectus must include financial details, risk factors, objectives, and terms of the issue.

It must be:

• Registered with the RoC before issuance

• Compliant with SEBI (Securities and Exchange Board of India) guidelines

Alternatively, if a public company chooses not to raise capital publicly, it can file a Statement in Lieu of Prospectus.

8. Allotment of Shares

After receiving applications from the public, the company allots shares as per SEBI rules and procedures. Allotment must be made within the specified time, and return of allotment must be filed with the RoC.

9. Certificate of Commencement of Business

Unlike private companies, public companies must file a declaration in Form INC-20A stating that:

• Minimum subscription has been received

• Directors have paid for their shares

• The company has verified its registered office

Once the RoC is satisfied, it issues the Certificate of Commencement of Business, which authorizes the company to begin operations.

Significance of Public Company:

• Large Capital Mobilization

Public companies can raise vast amounts of capital by offering shares to the general public. Through Initial Public Offerings (IPOs) and subsequent public issues, they attract investments from individuals, institutions, and foreign investors. This large capital pool supports expansion, infrastructure development, R&D, and diversification. The ability to access public money enables companies to operate on a larger scale than private firms and helps them remain competitive in capital-intensive industries such as manufacturing, telecom, and technology.

• Enhanced Public Confidence and Credibility

Being listed on a recognized stock exchange and complying with regulatory norms gives a public company higher transparency and accountability. These aspects enhance investor trust and public confidence. Financial disclosures, regular audits, and governance standards build credibility with stakeholders such as banks, suppliers, and customers. This trust can attract better financing terms and business partnerships. Public visibility also boosts the company’s image, making it easier to gain media attention, market recognition, and consumer loyalty.

• Perpetual Succession and Continuity

A public company enjoys perpetual succession, meaning its existence is not affected by changes in ownership or the death of shareholders. This feature ensures business continuity and stability, which is especially important for investors and partners involved in long-term projects. It also provides assurance to employees and customers that the company will continue operations uninterrupted. This legal structure allows a public company to evolve across generations, making it suitable for building large, sustainable enterprises.

• Access to Wider Market Opportunities

Public companies benefit from brand recognition, stock market visibility, and public perception, which opens up domestic and global business opportunities. They often receive better deals, partnerships, and government contracts due to their scale and reliability. Their public status gives them an edge in competitive bidding, foreign collaborations, and institutional funding. Additionally, multinational presence becomes feasible, as public companies are often seen as stable, trustworthy, and capable of handling cross-border operations and trade.

• Facilitates Employee Motivation through Ownership

Public companies can offer stock options, performance-linked shares, and bonus issues to their employees. This creates a sense of ownership and directly links employee efforts to the company’s financial success. Such compensation structures boost motivation, productivity, and retention of talent. Employees become stakeholders, which improves morale and loyalty. By aligning employee interests with company goals, public companies build strong human capital, an essential element for sustained innovation and competitive advantage.

• Promotes Economic Development

Public companies play a key role in a nation’s economic growth by contributing to GDP, generating employment, and creating wealth for investors. Their large operations require skilled and unskilled labor, extensive supply chains, and infrastructure development. As public companies grow, they stimulate ancillary industries and regional development. They also contribute to tax revenue and support economic reforms by encouraging formal business practices, market discipline, and public participation in industrial and financial growth.

• Attracts Institutional and Foreign Investment

Due to their transparent operations, regulatory compliance, and scale, public companies are attractive to institutional investors like mutual funds, insurance companies, and foreign portfolio investors (FPIs). These investors bring not only capital but also credibility and global expertise. Their presence can positively influence share prices, governance, and operational efficiency. Public companies, through foreign investments, also gain access to international markets, advanced technologies, and collaborative growth opportunities, making them vital to economic globalization.

• Encourages Better Corporate Governance

Public companies are required to follow strict governance frameworks laid down by the Companies Act, SEBI, and stock exchanges. They must conduct regular board meetings, appoint independent directors, maintain transparency in disclosures, and uphold shareholder rights. This structure encourages responsible behavior from directors and executives, minimizing the risk of fraud and mismanagement. Good governance practices enhance accountability, build investor trust, and ensure that company decisions align with stakeholder interests, fostering long-term sustainability.

Types of Public Company:

Public Company is a type of business organization that offers its shares to the general public and is governed by the Companies Act, 2013 in India. It must have a minimum of seven members, with no upper limit, and can raise capital by issuing securities. Based on legal structure, ownership, and operations, public companies can be classified into several types:

1. Listed Public Company

Listed public company is one whose shares are listed on a recognized stock exchange such as the NSE (National Stock Exchange) or BSE (Bombay Stock Exchange).

Features:

• Shares are traded publicly.

• Subject to SEBI regulations and disclosure norms.

• Offers liquidity to shareholders.

• High transparency and public visibility.

Example: Companies like Reliance Industries, Infosys, and Tata Steel are listed public companies.

Listed companies have broader access to capital and greater public trust but are subject to strict regulatory compliance.

2. Unlisted Public Company

Unlisted public company is a public company that is not listed on any stock exchange, but it can still raise capital by issuing securities to the public, typically through private placements.

Features:

• Shares are not traded on stock exchanges.

• Less regulatory burden compared to listed companies.

• Still subject to certain public company norms under the Companies Act.

Example:

Some large conglomerates and state-owned enterprises may fall into this category if they are not publicly traded.

Unlisted public companies are ideal for large-scale businesses that need public funding without facing stock market volatility.

3. Government-Owned Public Company

Government-owned public company, also known as a Public Sector Undertaking (PSU), is a public company in which the central or state government owns at least 51% of the paid-up share capital.

Features:

• Majority ownership by the government.

• Often operates in strategic sectors like energy, defense, and transportation.

• Subject to dual control – by the Companies Act and respective government ministries.

Examples:

• ONGC (Oil and Natural Gas Corporation)

• SAIL (Steel Authority of India Limited)

• GAIL (Gas Authority of India Limited)

These companies aim to balance profitability with public welfare and national interest.

4. Multinational Public Company

Multinational public company is a public company that operates in more than one country, usually with offices, factories, or branches abroad.

Features:

• Listed in its home country and sometimes cross-listed in foreign exchanges.

• Operates on a global scale.

• Complies with international standards and corporate governance norms.

Examples:

• Infosys, TCS, and Wipro (Indian companies with international presence)

• Apple Inc., Microsoft Corporation (foreign multinational public companies operating in India)

Such companies benefit from global capital, cross-border markets, and technological advancements.

5. Subsidiary of a Public Company

Subsidiary of a public company is legally considered a public company even if it is not listed or invites public investment. This is as per Section 2(71) of the Companies Act.

Features:

• The holding company is a public company.

• It must follow public company regulations.

• May or may not be listed.

Example: If a public company holds more than 50% of the shares or controls the board of another company, the latter becomes its subsidiary.

Advantages of Public Company:

• Access to Large Capital

Public companies can raise substantial capital by offering shares to the general public through stock exchanges. This ability enables them to finance large-scale operations, invest in research and development, and expand domestically and internationally. The wider investor base reduces dependence on a few financiers and enhances financial stability. This access to capital is crucial for businesses operating in infrastructure, manufacturing, and technology sectors where continuous funding is required to maintain growth and competitiveness.

• Limited Liability of Shareholders

Shareholders in a public company enjoy the benefit of limited liability. Their responsibility is limited to the amount unpaid on their shares, which protects personal assets in case the company faces financial difficulties. This security encourages more people to invest in public companies without fearing personal financial ruin. The principle of limited liability enhances public participation in corporate ownership, leading to broader capital availability and reducing the perceived risk for investors.

• Free Transferability of Shares

One of the major advantages of a public company is that its shares are freely transferable. Investors can buy or sell shares on the stock exchange at their convenience. This provides liquidity and flexibility to shareholders, making public companies an attractive investment option. Free transferability also helps the company gain market valuation and fosters investor confidence, as stakeholders can enter or exit their investment without complex legal procedures or approvals from the company.

• Perpetual Succession

Public companies enjoy perpetual succession, meaning they continue to exist despite changes in membership or ownership. The company is a separate legal entity, and its operations are not affected by the death, resignation, or insolvency of shareholders or directors. This legal stability promotes investor trust, facilitates long-term planning, and allows the company to sign contracts and execute projects confidently. Perpetual succession supports sustainability and is a key reason public companies survive over generations.

• Enhanced Credibility and Public Image

Being listed on a stock exchange and adhering to strict regulatory compliance enhances a public company’s reputation and trustworthiness. Regular audits, transparent disclosures, and investor engagement foster a positive public image. This credibility is crucial for building business relationships with banks, suppliers, and clients. A good public image also attracts skilled employees and long-term investors. Enhanced credibility often translates to better financing terms and easier access to international markets and business collaborations.

• Employee Motivation and Ownership

Public companies can offer stock options and share-based incentives to employees, which align their interests with the company’s success. This ownership feeling boosts employee motivation, loyalty, and productivity. Such incentives are especially attractive to skilled professionals and executives. With performance linked to rewards, companies foster a results-driven culture and retain top talent. Employee stock ownership also leads to a shared vision and commitment toward organizational growth and innovation

• Professional Management

Public companies are managed by a Board of Directors and executive officers who bring specialized expertise and experience. Shareholders, being numerous, elect directors to ensure proper governance and strategic direction. This structure facilitates the appointment of professional managers who operate with accountability and efficiency. A professional management team helps the company scale operations, enter new markets, and adapt to technological and regulatory changes while maintaining corporate ethics and shareholder value.

• Contribution to Economic Growth

Public companies play a critical role in national economic development. By raising capital, generating employment, and producing goods and services on a large scale, they contribute significantly to GDP. Their public nature allows common citizens to participate in wealth creation through stock ownership. Additionally, they promote formal business practices, drive industrial innovation, and support ancillary industries. Public companies also contribute to government revenue through taxes, duties, and compliance with financial laws.

Limitations of Public Company:

• Extensive Legal Compliance

Public companies are subject to stringent regulatory requirements under the Companies Act, SEBI guidelines, and stock exchange rules. They must regularly file financial statements, conduct annual general meetings, and maintain records for inspection. These legal formalities increase operational complexity and require a dedicated compliance team. Non-compliance can lead to heavy penalties and reputational damage. While ensuring transparency, such rigorous regulation increases administrative costs and reduces the flexibility in decision-making, especially when compared to private companies.

• Loss of Control by Founders

In a public company, ownership is distributed among thousands of shareholders. Founders often lose majority control, especially after public listings and further share issuances. Shareholders elect the Board of Directors, who in turn appoint professional managers. This can create a disconnect between ownership and management. Founders may find it challenging to influence key decisions or retain strategic control, particularly if institutional investors or activist shareholders demand changes contrary to the founders’ original vision.

• Vulnerability to Hostile Takeovers

Since shares of a public company are freely traded, it becomes susceptible to hostile takeovers. A competitor or investor group can acquire a large portion of shares from the market and attempt to gain control without the consent of the existing management. Such takeovers may destabilize business operations, impact employee morale, and change the strategic direction of the company. Preventing takeovers requires legal safeguards and defensive tactics, which add to management complexity.

• High Cost of Formation and Maintenance

Forming and maintaining a public company involves considerable expenses. Costs include legal fees, registration charges, prospectus preparation, listing fees, underwriting, advertising, and ongoing compliance costs. After listing, the company must invest in investor relations, regulatory filings, and audit processes. These expenses can be burdensome for newly formed or mid-sized public companies. In comparison to other business forms, a public company is often the most expensive and administratively intensive to operate.

• Lack of Confidentiality

Public companies must disclose sensitive financial and operational information to shareholders, regulators, and the general public. Annual reports, board decisions, and performance metrics are available publicly. This reduces confidentiality and may provide valuable insights to competitors. Business strategies, expansion plans, and innovations become harder to protect. The lack of secrecy can impact competitive advantage, especially in technology, pharmaceutical, and financial sectors where information is a crucial asset.

• Pressure to Deliver Short-Term Results

Public companies are under constant pressure from shareholders and the stock market to deliver short-term financial performance. Quarterly earnings reports and share price movements often drive decisions, sometimes at the expense of long-term goals. This can discourage investments in R&D, sustainability, or employee development. Management may be forced to prioritize market expectations over innovative or strategic initiatives, leading to conservative planning and reduced risk-taking capacity in evolving markets.

• Dilution of Earnings

As public companies raise capital by issuing new shares, the existing shareholders’ earnings per share (EPS) may decrease unless profits rise proportionately. This dilution can discourage long-term investors. Also, to maintain investor confidence, companies may feel obligated to distribute profits as dividends rather than reinvesting in the business. This can limit reinvestment opportunities and slow down growth in the long term, particularly in sectors where continuous capital reinvestment is essential.

• Increased Public and Media Scrutiny

Public companies are constantly in the limelight and attract attention from the media, analysts, and investor groups. Any underperformance, legal issue, or management conflict is quickly publicized, potentially damaging reputation and market value. This level of scrutiny may distract leadership and reduce their flexibility to make confidential or experimental business moves. Even minor errors or changes in strategy can cause large shifts in share price and investor confidence.

Key Differences Between Public Company and Private Company