Q9) EXPLAIN PUBLIC COMPANY ,ITS ADVANTAGES AND

DISADVANTAGES ?

Introduction

A public company is defined as a company that offers a part of its ownership in the
form of shares, debentures, bonds, securities to the general public through stock
market.

Section 2(71) of the Companies Act, 2013, defines a public company, which states
that a public company means a company which,

• A company that is not a private company

• Has a minimum of seven members, no maximum limit is mentioned
• Has a minimum paid-up capital of five lacs, again there is no maximum limit
• A private company that is a subsidiary of a public company, will be considered a
public company

A public company can be segmented into two types:

1. Listed Company-

A Company whose shares are listed and traded in the stock exchange like, Tata
Motors, Reliance, etc.

2. Unlisted Company-

A Company whose shares are not listed in the stock exchange and thereby these
shares cannot be traded in the stock exchange.
Characteristics of public company

• Legal Identity:

The public company is a separate corporate body, which is different from its
shareholders and members

• Share transferability:

The most distinctive feature of the public company is its easy and
convenient share transferability. The public can subscribe to the shares of
the company and can even easily transfer them.

• Limited Liability,

The term limited liability means that a shareholder or any investor is liable
only till the extent of their shares and holding in the company. This means
that in cases where the company faces any kind of loss or damages, the
shareholders or investors do not need to pay off the debts in their personal
capacity. Their liability shall extend only to their shares.

• Prospectus:

The public company has the unique feature of having a right to issue a
prospectus for inviting the public at large to invest and buy their securities.
This prospectus contains the financial and operational details of the
company.

• Transparency: The public company has to maintain their company's

information regarding its financials, operations and other strategies in order
to gain more investment from the public. The public company even under
 the Companies Act, 2013, is compelled to make some disclosures
compulsorily.

Advantages of Public Companies

• Ability to Raise Capital

Being that a public company is open to investment, it is quite easy to raise capital.
This is one of the most attractive benefits of structuring your business as a public
company. Thus, this type of company is able to raise capital by issuing public
shares. As public companies list their stocks on a recognised public exchange,
members of the public and big time investors are able to buy the public companies
stock/shares and become equity owners. These equity owners are in turn, called
shareholders.

• Company Growth

Being that your company is able to raise capital by selling stocks on a public
exchange, the possibilities for company growth are truely unlimited.The major
advantages include the ability to: Undertake new projects, new research and new
company developments, Engaging in acquisitions, Minimise the risk of debts
resulting insolvency.

The growth of any company is truely in the hands of its directors or owners.
Therefore, even though natural and organic company growth is a great advantage
of a public company, it is really up to business owners/directors to foster their
companies development.

• Wider shareholder base:

Public companies can spread the risk of ownership to a larger group of people.
• Perpetual succession:

It has a perpetual succession, meaning it can continue to exist even if the

ownership or management changes.

• Transferability of ownership:

Shares represent the ownership of the business. They can be bought and sold
on a stock exchange or privately. This means the company’s ownership is
easily transferrable without affecting its operations or existence

• Centralized management:

A company’s management is centralized and usually conducted by a board

of directors or a group of executives. The shareholders or owners have
limited involvement in the company’s day-to-day operations.

• . Increased Visibility and Credibility:

Public companies are often viewed as more credible and stable, which can
enhance their reputation and attract new customers, investors, and partners.

• Attracting and Retaining Top Talent:

Public companies can offer stock options and other equity-based incentives
to attract and retain top talent.

• Increased Market Value:

Public companies can experience an increase in market value, which can

provide a higher valuation for the company and its shareholder

• . Access to Debt Markets: Public companies can access debt markets, such
as bond markets, to raise capital at a lower cost.
 • Improved Negotiating Power:

Public companies can have improved negotiating power with suppliers,

customers, and partners due to their increased size and credibility.

• Potential for Mergers and Acquisitions:

Public companies can be more attractive targets for mergers and

acquisitions, providing opportunities for growth and expansion.

• Increased Research Coverage:

Public companies can attract research coverage from analysts and

investment banks, providing valuable insights and recommendations.

• Improved Brand Recognition:

Public companies can experience improved brand recognition and

awareness, which can enhance their reputation and attract new customers

Disadvantages of a Public Companies

• High level of Regulation

There is a high level of regulation and compliance that comes with public
companies. The main reason is that potential investors and the general public need
protection. As public companies are able to raise capital through their shareholders,
there are a range of mandatory disclosure requirements.

This includes the requirement that public companies must provide for a disclosure
document, or prospectus, to all potential investors. Accordingly, a prospectus will
outline the company’s financial risks, profits, losses, assets, liabilities and business
model.
• Increased scrutiny

Public companies are subject to more scrutiny from the government, regulatory
agencies, and the public. They must adhere to mandatory reporting standards and
prepare financial reports in accordance with accounting principles.

• Time-consuming process

The initial public offering (IPO) process can be lengthy and time-consuming,
often taking up to two years.

• Less operational flexibility

Public companies have additional constraints to protect shareholders from

unnecessary risks.
• Stock market vulnerability
Public companies are more susceptible to influence on value than private limited
companies.

• Ownership and management dilemmas

It can be difficult to regulate the wide range of shareholders in a public company.

• Expensive to set up and operate

•

Public companies can be expensive to set up and operate.

• Management and administrative problems

Public companies can experience management and administrative problems.

• . Loss of Control: By going public, the company's founders and
management may lose some control over the company's direction and
decision-making.

• . Disclosure Requirements: Public companies must disclose sensitive

financial and operational information, which can be a disadvantage in
competitive markets.

• . Increased Costs: The process of going public and maintaining a public

listing can be expensive, with costs including listing fees, auditing fees, and
legal fees.
• Market Volatility: Public companies are subject to market fluctuations,
which can impact the company's stock price and overall value.

• Short-Term Focus: Public companies may feel pressure to focus on short-

term profits and quarterly earnings, rather than long-term growth and
sustainability.

• . Liability Concerns: Public companies and their directors and officers may
face increased liability risks, including class-action lawsuits and securities
litigation.

• Restrictions on Share Transactions: Public companies may face

restrictions on share transactions, including insider trading rules and
blackout periods.

• . Compliance with Stock Exchange Rules: Public companies must comply

with the rules and regulations of the stock exchange on which they are
listed.
 • . Risk of Hostile Takeovers: Public companies may be vulnerable to
hostile takeovers, which can be a disadvantage for the company's founders
and management.

• Increased Scrutiny: Public companies are subject to increased scrutiny

from investors, analysts, and the media, which can be a disadvantage for
companies that prefer to operate privately.

• . Risk of Share Price Volatility: Public companies may experience share

price volatility, which can impact the company's ability to attract and retain
investors.

CONCLUSION

A public company is a type of business entity that issues stocks and bonds to the
public and is listed on a stock exchange. Public companies are subject to regulatory
oversight, financial disclosure, and shareholder scrutiny.