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I am sure you are looking forward to learning about Companies.

You now know that with rapid industrialization, the need for huge enormous capital and also the need to diversify & limit risk was felt by most businesses. This led to the formation of Companies.

A Company – What is it

• A Company is basically an artificial person created by law.
• It is a registered association of individuals.
• It has a legal existence -which is separate from it’s Shareholders/ Owners.
• The capital of the Company is divided into transferable shares.
• A Company limited by shares means that the liability of the shareholders to the creditors of the Company is limited to the capital invested. In other words, an investor or shareholder loses only the money he has invested in the company in the event of the company becoming insolvent. The shareholders personal assets are fully protected and only his investment (or capital invested) in the company is at risk.

The most popular types of companies are- Private Limited Company and Public Limited Company.

 

 

Private Limited Company – What is it

• A Private Limited Company is a registered small business entity.
• It is privately held by a few members.
• In India, the Companies Act, 2013 states that a Private Limited Company can have a minimum of two members and a maximum of 200.
• This type of Company is limited by shares and those shares are alloted to the few members only.
• Internal and private sale and transfer of shares is possible.
• These shares are not listed on any Stock Exchange. This means that the shares cannot be bought and sold on any stock exchange or traded publicly.

 

Interesting Examples

Saudi Aramco is the leading oil & gas company of the world. It is privately owned by the kingdom of Saudi Arabia. It is amongst the largest private companies of the world. The Saudis plan to offer up to 5% of Aramco in the IPO, at a predicted price of $100 billion. This would give Aramco a valuation of $ 2 trillion making it the largest IPO ever. Initially, the IPO was expected to take place in early 2018, but the expected date has since been pushed off to late 2018 or early 2019. Aramco plans to offer shares on TADAWUL the Saudi stock exchange.

Infosys is a leading Indian multinational. It provides business consulting, information technology and outsourcing services. It began as a Private Limited Company in 1981. Infosys was incorporated by N R Narayana Murthy and six other engineer friends with a capital of $250. It became a public limited company after 11 years i.e. in 1992.

Public Limited Company – What is it

• A Public Limited Company is a registered business entity.
• It has permission to issue shares to the general public through an Initial Public Offering (IPO).
• It is traded on at least one Stock Exchange.
• In India, the Companies Act, 2013, a Public Limited Company must have a minimum of 7 members and there is no limit on the maximum number of members.
• This Company is to be managed by a Board of Directors (minimum 3, maximum 15) elected by the shareholders in the Annual General Meeting (AGM) of the Company.
• The shares of Public Limited Companies can be freely purchased and sold on the Stock Market.

 

 

Interesting Examples

East India Company was incorporated by a British royal charter in 1600.  It is widely recognised as the world’s first publicly traded company. The very simple reason for this was the need for distribution of risk.

When the riches of the East Indies were first discovered explorers sailed there in huge numbers. However, very few ships survived. Ships would sink or get damaged due to storms. Moreover pirates would loot or hijack the fortune laden ships. Financiers and investors of these voyages realised they had to minimize their risk. They could only do this by investing in many ships and voyages. If even one ship out of  three survived they could make a profit. So the East India Company was born with the limited liability formula. The investor in a particular voyage would only get that percentage of profit or loss as his investment.

Conclusion

Armed with basic background knowledge of the various business formats we are ready to make our entry into the very interesting Stock Markets. (Excited? So am I!!) Keep following my blog so that you can continue on the road to Stock Market education in the simplest manner possible.

So friend ponder on this and keep giving your valuable comments and suggestions. Come back recharged for an exciting journey together.