There are more legal restrictions governing in the formation and operation. A PLC has a lengthy procedure, the Memorandum of Association, Article of Association and Statuary declaration are sent to the Registrar. If the Registrar is satisfied then the company receives a ‘Certificate of Information’. PLC's are required to print a prospectus so that the public, which are the shareholders, knows about the profits, losses and aims of the business. They are also required to publicise its audited accounts. This involves a lot of work and expenses and this information is also available to competitors who might use it against the business. Shares that are quoted on the Stock Exchange are subject to be taken over by hostile companies or there can even be a management buy-out. Engro Chemicals bought the shares of their archrivals, Dawood Hercules Fertilisers and gained control over the company.
A PLC can invite members of the public to subscribe to shares that are freely transferable and can be brought through the stock exchange. This leads to increasing the capital of the business, and this money can be used to expand the business, introduce new products, market the goods and services in a better way, for market research, new technology, increasing the wages of the management and hiring specialised workers. By tapping the resources of the shareholders it is easier for a PLC to obtain loans from banks. With more capital the firm can produce on a large scale and enjoy economies of scale, like employing specialists and buying in bulk at good trade discounts. However, this can lead to a number of problems. The prices of the shares are subject to fluctuations, and the trading of shares has virtually become a source of profit. The shareholders are not interested in the expansion of the business, but more in the dividends.
In a PLC it is highly likely that there will be a divorce between ownership and control. This is because of the huge number of shareholders appoint a board of directors at the Annual General Meeting, these directors control the management and make the decisions. The shareholders are the general public and they invest money for dividends and not because they are interested in the expansion of the business. The directors may aim towards long-term goals and the shareholders towards short-term goals, this causes friction and can be highly damaging for the business.
As the company is very large in size, many problems will start to occur. The owners are far removed from the customers and the personal touch may be lost. The business gets no feedback on how the product is doing in the market, but here the capital may be used on market research, to get feedback. There is a loss of overall ownership and control of the business. Decision-making will take time and there may be disagreements as well. The company's tax burden is also heavier as it is subject to a flat rate of 33% of the company's profits.
All of the above mentioned factors should be kept in mind before the conversion of a private limited company into a public one.
Amna Qayyum
AI
