The activity of producing goods or rendering services in exchange for money is the idea of running a business. There are different forms for setting up business organisations, like – sole proprietorship firms, partnership firms, trusts, companies, etc.
While setting up businesses as sole proprietorship and partnership firms are easy, their main drawbacks are limited capital and unlimited liability. Learn to invest with a small budget.
This article talks about a form of business that overcomes the limitations of others.
What Is a Joint Stock Company? Meaning & Definition
Definition of a joint stock company: Professor Haney defines it as “a voluntary association of individuals for profit, having a capital divided into transferable shares, the ownership of which is the condition of membership.”
Meaning of joint stock company: As the definition suggests, it is a form of organisation where individual investors pool money to run the business in exchange for a part ownership.
These investors hold ownership in the form of shares that can be traded in the secondary market, at their will.
A few examples of joint stock companies in India are Tata Consultancy Services, State Bank of India and Reliance Industries Ltd.
You may also like: Turbulence ahead with Tata mega merger
Key Features & Characteristics of Joint Stock Companies
The unique characteristics of a joint stock company are what distinguishes it from other forms of business. Joint stock companies are registered and governed by the Companies Act, 2013.
- Separate entity – One of the significant features of a joint stock company is its distinct legal status. While sole proprietor and partnership firms see the business and its owner as the same, the joint stock company sees the owner and the business as separate entities with different legal statuses.
- Limited liability – Since the owner and business are different entities, the owner’s liability is limited. The owner does not bear the entire liability of the business but takes responsibility only to the extent of shareholding.
- Common seal – This goes back to the company having its own status. Since owners are only representatives of the company and not the company themselves, they cannot sign on behalf of the company. The company must have a seal in its own name to be used on formal documents.
- Share transfers – The shareholders of a joint stock company have the liberty to trade their shares to other individuals without any specific consent from the other owners.
- Perpetual – The river is used as a metaphor to describe this feature. The Brook is a poem about the river that says, “Men may come and men may go, but I go on forever.” Similarly, the company’s shareholders may change, but the company’s existence will go on until it is legally liquidated.
Types of Joint Stock Companies & Their Structures
- Registered company – A company set up under the Companies Act in India, fulfilling all the legal requirements of the act, is called a registered company.
A registered company can either be a private or a public limited.
A private limited company is where the public does not have access to shares. It should have two members at least and 200 members at the maximum.
A public limited is a large-sized company where shares are offered to the public to raise capital. A public company has no rule on the upper limit of members, but it requires at least seven members to start the business.
- Chartered company – A company formed and governed under special charters is called a chartered company. A charter is a written agreement by an authority (Eg: Government), that grants permission to start a company. The charter also lays the set of rules that the company has to follow.
These companies have unique advantages as compared to regular companies.
Example: The East India Company established under the Charter Act 1813.
- Statutory company – A company formed under a specific act of the parliament to handle particular government projects is called a statutory company.
Also Read: Understanding blue chip stocks – Meaning, features and their safety
Advantages of Joint Stock Companies & How They Work
- Public companies, upon fulfilling certain requirements, have the authority to list their shares and offer them to the public. The companies get access to large-scale capital, which helps them in running large-scale businesses.
- Sizeable capital helps to establish companies with increased production capacity, helping them achieve cost advantages.
- The responsibility of shareholders is bound by the extent of shareholding. This means that the personal properties of shareholders are not related to the business, unlike the case in sole proprietor and partnership firms.
- Investors have the freedom to trade their shares in the stock market and earn profits on their investments. Joint stock companies also provide transparency to their investors by publishing their financial statements to the public.
Limitations
- Starting a joint stock company involves a lot of legal formalities. So, this requires a company to fulfil multiple eligibility criteria, making the registration process lengthy. The registration of companies is also considered a costly affair.
- Since joint stock companies, especially public limited companies, have numerous shareholders, the possibility of conflicts and disputes is high.
- The Companies Act requires all public companies to disclose their financial statements. While this is an advantage to the investors, it is a disadvantage for the management as there is no secrecy and confidentiality.
Joint Stock Company vs Partnership: Key Differences
| Partnership firms | Joint stock companies |
| Governed under the Indian Partnership Act of 1932. | Governed by the Companies Act of 2013. |
| The owners of the partnership firms are called partners. | The owners are shareholders. They may appoint representatives to manage the business. |
| The partners and the business are classified as a single entity. | The shareholders and the business are distinct legal entities. |
| There is a binding on the personal assets of partners i.e., the liability of partners is unlimited, except in the case of limited liability partnerships. | The extent of shareholding determines the liability of shareholders. |
How Joint Stock Companies Operate: A Step-by-Step Guide
1. Formation & Registration:
- A joint stock company is formed by individuals pooling capital and registering under the Companies Act.
- The process includes choosing a business structure (public or private limited), drafting a Memorandum of Association (MoA) and Articles of Association (AoA), and registering with the Registrar of Companies (ROC).
2. Capital Collection:
- Companies issue shares to raise capital from investors.
- Shareholders become partial owners and have voting rights based on their shareholding.
3. Business Operations & Management:
- Managed by a Board of Directors, elected by shareholders.
- Decision-making follows corporate governance principles, with shareholders influencing key policies during AGMs (Annual General Meetings).
4. Profit Sharing & Dividends:
- Profits are either reinvested into the company (retained earnings) or distributed as dividends to shareholders.
- Shareholders also benefit from capital appreciation if share prices rise.
5. Regulation & Compliance:
- Companies follow SEBI (Securities and Exchange Board of India) regulations and financial disclosure norms.
- Compliance with taxation, audit, and corporate governance laws is mandatory.
Examples of Joint Stock Companies & Their Market Impact
1. Tata Group (Tata Sons Ltd.)
- One of India’s largest conglomerates with interests in IT (TCS), automobiles (Tata Motors), steel (Tata Steel), etc.
- Market impact: A significant player in multiple industries, driving employment and economic growth.
2. Reliance Industries Ltd.
- A diversified company with interests in petrochemicals, telecom (Jio), and retail.
- Market impact: Stock price fluctuations influence India’s stock market and investor sentiment.
3. Infosys Ltd.
- A major IT services company operating globally.
- Market impact: A leader in outsourcing, contributing to India’s software exports and stock market performance.
4. HDFC Bank
- One of India’s leading banks, providing financial services and digital banking solutions.
- Market impact: Affects banking sector trends and investor confidence.
5. Hindustan Unilever Ltd. (HUL)
Market impact: Influences FMCG sector growth and consumer spending patterns.
Challenges & Limitations of Joint Stock Companies
1. Complex Legal & Regulatory Requirements: Companies must comply with multiple laws, such as the Companies Act and SEBI regulations, making operations legally intensive.
2. High Administrative & Operational Costs: Joint stock companies require extensive paperwork, audits, and financial disclosures, leading to higher administrative costs.
3. Risk of Hostile Takeovers: Since shares are publicly traded, other entities can acquire controlling stakes, leading to loss of ownership control.
4. Conflicts Between Shareholders & Management: Shareholders may demand higher dividends, while management might prioritize reinvestment for growth, causing conflicts.
5. Double Taxation: Companies pay corporate tax on profits, and shareholders pay dividend tax, reducing overall returns.
6. Lack of Personal Touch & Bureaucracy: Decision-making can be slow due to multiple levels of management and shareholder voting procedures.
Bottomline
A consumer goods company with brands like Lux, Dove, and Surf Excel.
Joint stock companies are among the most significant structures of business in India. Despite having stringent procedures, they are popular owing to the vast benefits of raising capital and limited liabilities.
Also Read: Everything you need to know about semiconductor stocks
The vast size of operations and revenues of companies have a crucial impact on the country concerning various economic factors like growth rate, GDP and employment.
From the investor’s perspective, joint stock companies have been a great source of investments and additional income.
