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CA Intermediate · Corporate and Other Laws · Companies Incorporated Outside India

Kaveri Textiles Ltd., an Indian company, has 40% of its paid-up share capital held by a Japanese company, Sakura Corp., and the rest by Indian citizens. Which statement is correct about the status of Kaveri Textiles?

Kaveri Textiles remains an Indian company. Under the Companies Act, a foreign company is one incorporated outside India. Foreign shareholding, even 40%, does not change the place of incorporation, so the company stays Indian, though FEMA rules on foreign investment may apply separately.

  1. AIt is a foreign company because a foreign entity holds a substantial stake
  2. BIt is an Indian company, as foreign shareholding does not alter a company's incorporation in IndiaCorrect
  3. CIt is a foreign company because its shares are held by a body corporate incorporated outside India
  4. DIt becomes an Indian company only if foreign holding falls below 26%

Explanation

Status under the Act depends on place of incorporation and having a place of business in India, not shareholding. Kaveri is incorporated in India, so it is an Indian company even with 40% foreign shareholding. Shareholding may matter under FEMA, but not for this classification.

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