Public Company: Meaning MCQs Quiz | Class 10

Understanding Public Companies

A Public Company is a type of joint stock company whose shares are offered to the general public, and whose shareholders enjoy the right to freely transfer their shares. It is distinct from a private company primarily by its ability to invite the public to subscribe to its securities and having no restriction on the maximum number of members.

Key Characteristics of a Public Company:

• Minimum Members: A public company must have a minimum of seven members. There is no upper limit on the maximum number of members.
• Free Transferability of Shares: Shares of a public company are freely transferable among its members, without any restrictions.
• Invitation to Public: A public company can invite the general public to subscribe for its shares and debentures through the issue of a prospectus.
• Suffix “Limited”: The name of every public limited company must end with the word “Limited” (e.g., ABC Ltd.).
• Prospectus: It must issue a prospectus or a statement in lieu of prospectus before allotting shares to the public.
• Minimum Subscription: Before a public company can allot shares, it must receive applications for a minimum number of shares specified in its prospectus (minimum subscription).
• Board of Directors: It is governed by a Board of Directors who are elected by the shareholders.
• Separate Legal Entity: Like all companies, a public company is a separate legal entity distinct from its members.
• Perpetual Succession: The existence of the company is not affected by the death, insolvency, or retirement of its members.

Advantages of a Public Company:

• Access to Large Capital: Can raise substantial capital from the general public, facilitating large-scale operations and expansion.
• Spreading Risk: Ownership is distributed among many shareholders, spreading the financial risk.
• Public Trust and Credibility: Due to stringent regulations and disclosures, public companies generally enjoy higher public trust and credibility.
• Professional Management: Can afford to hire professional and expert managers due to its larger resource base.
• Liquidity: Shares are often traded on stock exchanges, providing liquidity to investors.

Disadvantages of a Public Company:

• Complex Formation: The process of forming a public company is complex, time-consuming, and expensive, involving many legal formalities.
• Strict Regulations: Subject to extensive legal regulations and government control (e.g., Companies Act), requiring numerous compliances and disclosures.
• Lack of Secrecy: Financial and operational information must be disclosed to the public and regulatory bodies, leading to a lack of business secrecy.
• Slow Decision-Making: Decision-making can be slow due to the need for board meetings, shareholder approvals, and adherence to legal procedures.
• Risk of Hostile Takeovers: The wide dispersion of ownership can sometimes make it vulnerable to hostile takeovers.

Comparison: Public Company vs. Private Company

Quick Revision Points:

• A public company allows general public to subscribe to its shares.
• Minimum 7 members; no maximum limit.
• Shares are freely transferable.
• Must use ‘Limited’ as suffix.
• Requires a prospectus to invite public funds.
• Formation is complex and highly regulated.

Extra Practice Questions:

1. Which of the following is NOT a feature of a public company?
1. Minimum 7 members
2. Restriction on transferability of shares
3. Invitation to public for shares
4. Suffix ‘Limited’ in its name
2. What is the minimum number of directors required for a public company?
1. 2
2. 3
3. 5
4. 7
3. A public company can raise capital from the public by issuing which document?
1. Memorandum of Association
2. Articles of Association
3. Prospectus
4. Certificate of Commencement
4. The liability of shareholders in a public company is generally:
1. Unlimited
2. Limited to their share capital
3. Dependent on the company’s profits
4. Limited to the company’s assets
5. Which of the following is an advantage of a public company?
1. Ease of formation
2. Strict government control
3. Access to large financial resources
4. High level of secrecy