DEMERITS

DEMERITS OF JOINT STOCK COMPANY

1) Difficulty in Formation : A company is not easy to form and establish. A number of persons should be ready to associate for getting a company incorporated. It requires a lot of legal formalities to be performed. The shares will have to be sold during the prescribed time. It is both expensive and risky.

(2) Lack of Secrecy : A company has to observe many legal formalities. Most of the business activities are decided through meetings. Profit and Loss Accountsand Balance Sheet are required to be published. So trade secrets cannot be maintained.

(3) Delay in Decisions : In company decisions making process is time consuming. All important decisions are made by either Board of Directors of by General Annual Meetings. So many opportunities may be lost due to delay in decision making.

(4) Separation of Ownership and Management : A company is owned by shareholders but managed by directors. The shareholders play an insignificant role in the working of the company. Though directors are owners of some qualification shares only, yet the result of their activities are to be borne by all shareholders. The profit of the company belongs to shareholders and the Board of Directors is paid only on a commission. There is no direct relationship between efforts and rewards. So the management does not take personal interest in the workings of company. Hence, they may work against the interest of vast majority of shareholders.

(5) Speculation in shares : The Joint Stock Companies facilitate speculation in the shares at stock exchanges. It has been found that even the directors and the managers of the company indulge in manipulating the value of shares to their advantage. When they want to purchase the shares they lower the rate of dividend and when they want to dispose of the shares they declare dividends at a higher rate.

(6) Oligarchic Management : The shareholders who are the real owners do not have much voice in the management. A handful of shareholders, which also manage the affairs of the company, are able to have control over it. Theoretically the company is democratic, but in practice it is mostly a case of oligarchy (Rule by few). A few persons hold power and control and try to exploit the majority. Thus, it does not promote the interest of the shareholders in general.

(7) Excessive Regulation : A company has to observe excessive regulations imposed by the law of the country. The excessive regulations are made with a view to protect the interest of the shareholders and the public but in practice they put obstacles in their normal and effective working. A lot of precious time, efforts, and financial resources are wasted in complying with statutory requirements.

(8) Conflict of Interest : In a company there are many parties whose interest may clash and the result may be conflict of interests. The management, the shareholders, the employees, the creditors and the government may have their own individual interests. Thus, a permanent type of conflict of interests may continue to exist in the companies. These conflicts generally lead to inefficiency in the management and reduce employee morale.

(9) Neglect of Minority : All major issues in company are decided by the shareholders having majority of them. Majority group always dominate over the minority group whose interest are never represented in the management. The company act provides measures against oppression of minority, but the measures are not very effective.