Forms of Business Units 6

Disadvantages of public limited companies

i) High costs of formation: The process of registering a public company is expensive and lengthy. Some of the costs of information are legal costs, registration fees and taxes

ii) Legal restrictions: A public company must comply with many legal requirements making its operations inflexible and rigid

iii) Alienation of owners: Shareholders non-participation in management is a disadvantage to them

iv) Lack of secrecy: The public limited companies are required by law to submit annual returns and accounts to the registrar of companies
denying the company the benefit of keeping its affairs secret.

They are also required to publish their end of year accounts and balance sheets.

v) Conflicts of interests: Directors may have personal interests that may conflict with those of the company.This may lead to mismanagement.

vi) Decision making; Important decision are made by the directors and shareholders. The directors and shareholders meet after long periods which make decision making slow/delayed and expensive.

vii) Diseconomies of scale: The large size and nature of business operations of public limited companies may result in high running/operation costs and inefficiency

viii) Double taxation: There is double taxation since the company is fixed and dividends distributed to the shareholders are also taxed

ix) Inflexibility: Public limited companies cannot easily change its nature of business in response to the changing circumstances in the market.

All shareholders must be consulted and agree.

Dissolution of a Company

The following are the circumstances that may lead to the dissolution of a company:

Failure to commence business within one year- If a company does not commence business within one year from the date of registration, it may be wound up by a court order on application of a member of the company.

Insolvency – when a company is not able to pay its debts, it can be declared insolvent and wound up.

Ultra- vires – this means a company is acting contrary to what is in its objective clause. In such a case, it may be wound up by a court order.

Amalgamation – two or more companies may join up to form one large company completely different from the original ones.

Court order – the court of law can order a company to wind up especially following complaints from creditors.

Decision by shareholders – the shareholders may decide to dissolve a company in a general meeting.

Accomplishment of purpose or expiry of period of operation – a company may be dissolved on accomplishment of its objects, or on expiry of period fixed for its existence.

The Role of Stock Exchange as a Market for
Securities
Definations

(1) Stock: a group of shares in a public limited company
- Stocks are formed when all the authorized shares in a particular category have been issued and fully paid for.

(2) Stock exchange market: is a market where stocks from Quoted companies are bought and sold
-Stock exchange markets enable share holders in public companies to sell their shares to other people, usually members of the public interested in buying them.

(3) A Quoted Company: is a company that has been registered (listed) as a member of the stock exchange market.

- Companies that are not quoted cannot have their shares traded in the stock exchange market.

(4) Securities: this could either refer shares or documents used in support of share ownership.

(5) Initial Public Offer (I. P. O): refers to situations in which a company has floated new shares for public subscription ( Has advertised new shares and has invited members of the public to buy them.

(6) Secondary market: The market that deals in second hand shares i.e. the transfer of shares from one person or organization to another.

There is only one stock exchange market in Kenya i.e. The Nairobi Stock Exchange.

A person wishing to acquire shares will do so either at an IPO or in the secondary market.

However, an investor cannot buy or sell stocks directly in the stock exchange market.

They can only do so through stock brokers.

Roles of the Stock Exchange Market

(a)Facilitates buying of shares - it provides

a conducive environment to investors who want to buy shares in different companies.

(b) Facilitates selling of shares - it creates a market for those who wish to sell their shares.

(c)Safeguarding investors’ interests - it monitors the performance of the already quoted companies and those found not meeting expectations are struck off.

Companies who want to be quoted must also attain a certain standard of performance.

(d) Provides useful information - it provides timely, accurate and reliable information to investors which enable them to make decisions on the
investments to make.

The information is passed on through mass media and
stock brokers.

(e)Assist companies to raise capital - it assists companies to raise capital by creating an environment through which companies issue new shares to members of the public in an IPO.

(f)Creation of employment - it creates employment for those who facilitate the buying and selling of shares eg stock brokers, stock agents etc.

(g) Raising revenue for the government - the government earns revenue by collecting fees and other levies/ dues from activities carried out in the stock exchange market.

(h) Availing a variety of securities - it avails a variety of securities from which an investor can choose from.

The market therefore satisfies needs of
various investors eg investors who wish to buy from different companies can do so in the market.

(i) Fixing of prices - the stock exchange market is in a position to determine the true market value of the securities through the forces of demand and
supply.

This is of great importance to both the buyer and the seller.

(j) Measures a country’s economic progress - the performance of securities in the stock exchange market may be an indicator of a country’s economic
progress e.g a constant rise in prices and volumes of securities traded within a given period of time would indicate that the country’s economy is positively growing.

(k) Promotes the culture of saving - it provides investors with opportunities to channel their excess funds. Such people act as role models to other members of the society who may emulate them thereby promoting a saving
culture.

Public Corporations (State Corporations)

These are organizations formed by and/or controlled by the government (the government has a controlling interest).

This means that the government owns more than 50% shares in the corporation. Where the government has full ownership, the organization is known as a parastatal

Public corporations are formed to perform certain/specific functions on behalf of the government.

They are formed to provide essential services that are generally in the public interest, and that may require heavy initial capital investment which few private investors can afford

They are formed by the act of parliament.
Examples
• Kenya Railways corporation- provides railway transport

• Telkom Kenya-provides telecommunication services
• Postal corporation of Kenya

• Industrial and commercial Development corporation (ICDC)- financial and management services

• Mumias and Chemelil sugar companies.

• Kenya air ways- provide air transport services. etc

Characteristics/features of public corporations

They are formed by the government under the existing laws i.e formed by an act of parliament eg education act

Initial capital is provided by the government

They are jointly owned by the government and members of public/private investors

They are set up to perform certain specific functions on behalf of the government

They are managed by a board of directors appointed by the government or appointed by the government and the joint owners

They have an entity of their own and can own property, enter contracts, sue and be sued

They have limited liability

Some operate without a profit motive while others have a profit motive

Formation

-Some are formed by an act of parliament while others are formed under the existing laws.

-When formed by an act of parliament, the Act defines its status obligations and areas of operation.

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