INCORPORATION OF A PUBLIC LIMITED COMPANY

This article is written by Danish Chandra ,BA LL.B student during his internship with Le Droit India.

ABSTRACT

Incorporating a Public Limited Company (PLC) is a significant decision that offers both advantages and disadvantages. A PLC is a type of company whose shares are traded on a public stock exchange, allowing it to raise capital from a broader pool of investors. This article delves into the key advantages of incorporating a PLC, such as access to capital markets, limited liability, enhanced credibility, and transferability of shares. Simultaneously, it explores the disadvantages, including stringent regulatory requirements, increased transparency and disclosure obligations, potential conflicts among stakeholders, dilution of ownership and control, and the cost and complexities of compliance. By understanding these pros and cons, companies can make informed decisions about whether incorporating as a PLC aligns with their strategic goals, risk appetite, and resources. The article also aims to provide insights into corporate governance considerations and best practices for PLCs to navigate the complexities of being a publicly traded entity.

Keywords:

Public Limited Company, Incorporation, Corporate Governance, Stakeholders

INTRODUCTION

The decision to incorporate a company as a Public Limited Company (PLC) is a significant milestone that can have far-reaching implications for the business and its stakeholders. A PLC is a type of company whose shares are traded on a public stock exchange, allowing it to raise capital from a broader pool of investors. This transition from a private to a public entity represents a fundamental shift in the company’s structure, operations, and governance.

Incorporating as a PLC is often driven by a company’s ambitions for growth, access to capital markets, and enhanced credibility. However, this journey also comes with a host of challenges and responsibilities. PLCs are subject to stringent regulatory requirements, heightened transparency and disclosure obligations, and the need to balance the interests of diverse stakeholders.

The decision to go public is not one to be taken lightly, as it involves a profound transformation of the company’s governance, operations, and public profile. It requires a comprehensive understanding of the advantages and disadvantages associated with this transition, as well as a commitment to upholding the highest standards of corporate governance and ethical conduct.

WHAT IS A COMPANY?

A company is an artificial legal entity, separate and distinct from its owners or members. It is created by following certain legal procedures and registering under the applicable laws governing companies in a particular jurisdiction.

Essentially, a company is a legal construct that allows a group of people to come together, pool their resources, and operate a business as a collective. It has its own legal rights and obligations, separate from the individuals involved in running it.

Section 2(20) of the Companies Act, 2013 defines a “company” as:

“Company” means a company incorporated under this Act or under any previous company law.

This definition highlights the key aspect that a company is an artificial legal entity created or incorporated under the Companies Act or any previous company law that governed companies before the current Act came into force.

Different Types of Companies

1. PrivateCompany: A private company is one that has a minimum paid-up share capital as prescribed and restricts the transfer of shares. It also limits the maximum number of members to 200.
2. Public Company: A public company is one that is not a private company. It can raise funds from the public and has no restriction on the maximum number of members or the transfer of shares.
3. One Person Company (OPC): An OPC is a specific type of private company where only one person is the member and the sole shareholder.
4. Limited Liability Partnership (LLP): An LLP is an alternative corporate business vehicle that provides limited liability to its partners. It is governed by the Limited Liability Partnership Act, 2008.

PUBLIC COMPANY

A public company, in the context of the corporate world, is a type of company whose shares are traded on a public stock exchange and can be bought and sold by members of the public.

Definition of a Public Company [Section 2(71)]: “Public company” means a company which: a) is not a private company; b) has a minimum paid-up share capital as may be prescribed.

Characteristics of a Public Company:

• Minimum Paid-up Share Capital: A public company must have a minimum paid-up share capital of Rs. 5 lakhs or a higher amount as may be prescribed from time to time. [Section 19(1)(b)]
• Minimum Number of Members: A public company must have at least 7 members. [Section 3(1)(b)]
• No Restriction on Transfer of Shares: There are no restrictions on the transfer of shares in a public company, unlike in a private company. [Section 58]
• Access to Public Funds: A public company can raise funds from the public by issuing securities through a prospectus. [Section 23]
• Listing of Securities: The securities of a public company can be listed and traded on a recognized stock exchange, subject to compliance with listing requirements.

INCORPORATION

Incorporation according to the Companies Act, 2013 (the Act) refers to the legal process of establishing a company as a separate legal entity. This essentially brings a business into existence as a distinct entity from its owners.

INCORPORATION OF PUBLIC COMPANY

The incorporation of a public company is a complex process involving legal, financial, and regulatory considerations. It is typically undertaken by companies seeking access to broader sources of capital, enhanced credibility, and the ability to trade shares on public markets.

Incorporation of a Public Company [Section 7]:

• The memorandum of association and articles of association must comply with the provisions of the Act.
• The company must obtain a certificate of incorporation from the Registrar of Companies.
• The company must have the prescribed minimum paid-up share capital.
• The company must have the required minimum number of members.

Key Compliance Requirements for Public Companies:

• Annual General Meetings and reporting requirements.
• Appointment of independent directors and auditors.
• Compliance with corporate governance norms and disclosure requirements.
• Compliance with regulations of the Securities and Exchange Board of India (SEBI) and stock exchanges (if listed).

INCORPORATION OF PUBLIC LIMITED COMPANY

The Companies Act, 2013 provides the legal framework for the incorporation of a public limited company in India.

• Definition of a Public Company [Section 2(71)]: A public company is defined as a company which: a) is not a private company, and b) has a minimum paid-up share capital as prescribed by the Act.
• Minimum Number of Members and Minimum Paid-up Share Capital [Section 3(1)(b) and Section 19(1)(b)]: A public company must have a minimum of 7 members and a minimum paid-up share capital of Rs. 5 lakhs or a higher amount as may be prescribed from time to time.
• Incorporation Process [Section 7]: The process of incorporating a public limited company involves the following steps: a) Obtaining approval for the company’s name from the Registrar of Companies (ROC). b) Preparing the Memorandum of Association (MoA) and Articles of Association (AoA) as per the prescribed format. c) Filing an application for incorporation with the ROC, along with the MoA, AoA, and other required documents and fees. d) The ROC will issue a Certificate of Incorporation if all requirements are met.
• Raising Capital from the Public [Section 23]: After incorporation, a public limited company can raise capital from the public by issuing securities through a prospectus, subject to compliance with the Companies Act, 2013, and the Securities and Exchange Board of India (SEBI) regulations.
• Corporate Governance Requirements: Public limited companies are subject to stringent corporate governance requirements under the Companies Act, 2013, and SEBI regulations. These include: a) Appointment of independent directors [Section 149] b) Constitution of various board committees (e.g., Audit Committee, Nomination and Remuneration Committee) [Sections 177 and 178] c) Compliance with accounting and auditing standards [Sections 129 and 143] d) Holding annual general meetings and filing annual returns [Sections 96 and 92]
• Listing on Stock Exchanges: Public limited companies can list their securities on recognized stock exchanges, subject to compliance with the listing requirements prescribed by SEBI and the respective stock exchanges.

ADVANTAGES OF INCORPORATING A PUBLIC LIMITED COMPANY

A. Access to Capital Markets

One of the primary advantages of incorporating as a PLC is the ability to access capital markets and raise funds from a broader pool of investors. By listing their shares on a public stock exchange, PLCs can tap into a vast capital pool, enabling them to fund growth initiatives, expand operations, or undertake strategic acquisitions. This access to capital markets is particularly beneficial for companies seeking to finance large-scale projects or ambitious expansion plans.

B. Limited Liability

Like other forms of incorporated companies, PLCs offer the benefit of limited liability to their shareholders. This means that the financial liability of shareholders is limited to the amount they have invested in the company. In the event of financial distress or bankruptcy, shareholders’ personal assets are protected, and their liability is capped at the value of their shareholdings. This limited liability protection can be particularly attractive for investors, as it mitigates their personal financial risks.

C. Enhanced Credibility and Brand Image

Becoming a publicly-traded company can enhance a company’s credibility and brand image. PLCs are often perceived as more established, transparent, and accountable, as they are subject to stringent regulatory oversight and disclosure requirements. This heightened credibility can facilitate business relationships, attract talented employees, and foster trust among customers, suppliers, and other stakeholders.

D. Transferability of Shares

Shares of a PLC are freely transferable, meaning they can be bought and sold on public stock exchanges. This liquidity and transferability of shares can be advantageous for investors, as it provides them with an exit option should they wish to divest their holdings. Additionally, the ability to trade shares can contribute to the efficient allocation of capital and facilitate the ownership transition of companies.

E. Tax Benefits

In certain jurisdictions, PLCs may enjoy certain tax advantages or incentives compared to private companies. These tax benefits can vary depending on the specific laws and regulations of a given country or region. For example, some jurisdictions may offer lower corporate tax rates or favorable tax treatment for dividends paid to shareholders of PLCs.

DISADVANTAGES OF INCORPORATING A PUBLIC LIMITED COMPANY

A. Stringent Regulatory Requirements

PLCs are subject to stringent regulatory requirements and oversight from various regulatory bodies, such as securities commissions and stock exchanges. These regulations aim to protect investors and ensure transparency and fairness in the capital markets. However, compliance with these regulations can be complex, time-consuming, and costly for companies. Failure to comply can result in significant penalties, legal consequences, and reputational damage.

B. Increased Transparency and Disclosure Obligations

As publicly-traded entities, PLCs are required to disclose a significant amount of information to the public, including financial statements, corporate governance practices, executive compensation, and material events or transactions. This increased transparency and disclosure can be beneficial for investors and stakeholders, but it also exposes the company to greater scrutiny and potential legal liabilities if disclosures are deemed inadequate or misleading.

C. Potential Conflicts of Interest among Stakeholders

PLCs have a diverse range of stakeholders, including shareholders, management, employees, customers, suppliers, and regulatory bodies. Each of these stakeholders may have different interests and priorities, which can lead to conflicts and competing demands. Managing these potential conflicts and balancing the interests of various stakeholders is a significant challenge for PLCs and their boards of directors.

D. Dilution of Ownership and Control

When a company goes public and issues new shares, it can result in a dilution of ownership and control for existing shareholders. This dilution can be a concern for founders, early investors, or majority shareholders who may see their influence and decision-making power diminished as the company’s ownership becomes more dispersed.

E. Cost and Complexities of Compliance

Complying with regulatory requirements, maintaining proper corporate governance structures, and meeting reporting and disclosure obligations can be costly and complex for PLCs. These costs can include legal and accounting fees, regulatory filing fees, investor relations expenses, and the resources required to maintain robust internal controls and risk management systems. Smaller companies may find these compliance costs to be a significant burden, affecting their profitability and competitiveness.

CASE LAWS

• Maruti Udyog Ltd. v. Ram Lal & Ors. [1997 (1) SCC 175]: This landmark case dealt with the issue of whether a public limited company could be converted into a private limited company. The Supreme Court held that a public limited company could be converted into a private limited company, provided that the necessary procedural requirements under the Companies Act were followed.
• Union of India v. Hindustan Development Corporation [1993 (3) SCC 499]: In this case, the Supreme Court discussed the principles governing the incorporation of a company and the role of the Registrar of Companies. The court held that the Registrar’s duty is limited to ensuring compliance with the procedural requirements for incorporation, and the Registrar cannot go into the merits or objects of the proposed company.
• Vodafone International Holdings B.V. v. Union of India [(2012) 6 SCC 613]: This high-profile case involved the acquisition of a public limited company (Hutchison Essar Limited) by Vodafone, a multinational telecommunications company. The case dealt with complex issues related to tax liability arising from the transfer of shares in a public limited company, highlighting the intricate legal and regulatory considerations involved in such transactions.
• National Thermal Power Corporation Limited (NTPC): NTPC, a leading public sector undertaking in the power sector, was incorporated as a public limited company on November 7, 1975, under the Companies Act, 1956. The company was established by the Government of India to manage and operat

REAL LIFE EXAMPLES

National Thermal Power Corporation Limited (NTPC): NTPC, a leading public sector undertaking in the power sector, was incorporated as a public limited company on November 7, 1975, under the Companies Act, 1956. The company was established by the Government of India to manage and operate power plants across the country. NTPC went public in 2004 and is currently listed on the NSE and BSE.

• Reliance Industries Limited (RIL): Reliance Industries Limited, one of India’s largest conglomerates, was originally incorporated as a public limited company on May 8, 1973, under the Companies Act, 1956. The company was founded by Dhirubhai Ambani with an initial capital of Rs. 15 lakhs. RIL went public in 1977 and issued its first initial public offering (IPO) in 1992, raising Rs. 1,671 crores, which was the largest IPO in India at that time.
• Infosys Limited: Infosys Limited, a leading Indian multinational corporation in the information technology sector, was incorporated as a public limited company on July 2, 1981, under the Companies Act, 1956. The company was founded by N.R. Narayana Murthy and six other engineers with an initial capital of $250. Infosys went public in 1993 and is now listed on the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE).

CONCLUSION

The decision to incorporate as a Public Limited Company is a significant strategic choice that requires careful deliberation and planning. While it offers several advantages such as access to capital markets, limited liability for shareholders, enhanced credibility and brand image, transferability of shares, and potential tax benefits, it also comes with inherent challenges and responsibilities.

PLCs face stringent regulatory requirements, increased transparency and disclosure obligations, potential conflicts among diverse stakeholders, dilution of ownership and control, and substantial costs and complexities associated with compliance. Navigating these challenges demands robust corporate governance practices, effective risk management systems, and an unwavering commitment to ethical conduct and stakeholder interests.

Companies must thoroughly evaluate their goals, resources, and risk appetite to determine if incorporating as a PLC aligns with their strategic objectives. They must be prepared to uphold the highest standards of transparency, accountability, and corporate governance while leveraging the opportunities presented by public listing and access to broader capital pools.

References

• Maruti Udyog Ltd. v. Ram Lal & Ors. [1997 (1) SCC 175] https://indiankanoon.org/doc/1081652/
• Reliance Industries Limited (RIL)
   https://www.ril.com/OurCompany/History.aspx
• Infosys Limited https://www.infosys.com/about/history.html
• Companies Act, 2013 https://www.mca.gov.in/Ministry/pdf/CompaniesAct2013.pdf