QUESTION

GS

Medium

Economy

Prelims 2021

Consider the following

  1. Foreign Currency convertible bonds
  2. Foreign Institutional investment with certain conditions
  3. Global depository receipts
  4. Non-resident external deposits

Which of the above can be included in Foreign Direct Investments?

Select an option to attempt

Explanation

Foreign Direct Investment (FDI) refers to the investment through capital instruments by a person resident outside India in an unlisted Indian company, or in 10% or more of the post-issue paid-up equity capital of a listed Indian company.

  • Statements 1 and 3 are correct: Foreign Currency Convertible Bonds (FCCBs) and Global Depository Receipts (GDRs) are instruments used by Indian companies to raise capital from foreign markets. Under the FDI policy of the Government of India, investments made through these instruments are treated as part of the FDI framework because they represent or convert into equity shares of the company.
  • Statement 2 is correct: While Foreign Institutional Investment (FII) is generally categorized as Portfolio Investment, the Arvind Mayaram Committee recommended that any investment by a foreign investor/FII/FPI that exceeds 10% of the equity of an Indian company should be treated as FDI. Thus, with the condition of reaching the 10% threshold, FII is included in FDI.
  • Statement 4 is incorrect: Non-Resident External (NRE) deposits are bank accounts maintained by NRIs in Indian banks. These are classified as 'Banking Capital' or 'External Debt' (if repatriable) and are not considered as Foreign Direct Investment in a productive enterprise.

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