Consider the following
- Foreign Currency convertible bonds
- Foreign Institutional investment with certain conditions
- Global depository receipts
- Non-resident external deposits
Which of the above can be included in Foreign Direct Investments?
Detailed Explanation:
Answer: Option 1 — 1, 2 and 3
Foreign Direct Investment (FDI) refers to 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. FCCBs and GDRs are treated as FDI because they convert into equity shares. Foreign Institutional Investment exceeding the 10% threshold is also classified as FDI as per the Arvind Mayaram Committee recommendations.
✅ Statement 1 – Correct: Foreign Currency Convertible Bonds (FCCBs) are debt instruments convertible into equity shares and are treated as FDI under India's FDI policy framework.
✅ Statement 2 – Correct: Foreign Institutional Investment (FII) with certain conditions, specifically when it exceeds 10% of equity capital, is classified as FDI as recommended by the Arvind Mayaram Committee.
✅ Statement 3 – Correct: Global Depository Receipts (GDRs) represent equity shares of Indian companies in foreign markets and are classified as FDI instruments.
❌ Statement 4 – Incorrect: Non-Resident External (NRE) deposits are banking capital maintained by NRIs in Indian banks and are classified as external debt, not as FDI in productive enterprises.
📝 Short Notes: Foreign Direct Investment (FDI) Classification
| Instrument/Category | Classification | Key Features |
|---|---|---|
| Foreign Currency Convertible Bonds (FCCBs) | FDI | Debt instruments convertible into equity shares; raise capital from foreign markets |
| Global Depository Receipts (GDRs) | FDI | Represent equity shares of Indian companies traded in foreign markets |
| American Depository Receipts (ADRs) | FDI | Similar to GDRs but specifically traded in US markets |
| FII/FPI (below 10%) | Portfolio Investment | Short-term investment in securities without controlling interest |
| FII/FPI (above 10%) | FDI | As per Arvind Mayaram Committee; reflects controlling interest |
| NRE Deposits | Banking Capital/External Debt | Bank accounts of NRIs; not investment in productive enterprises |
- FDI Definition: Investment in unlisted company or 10%+ equity in listed company by non-resident entities
- 10% Threshold: Critical benchmark distinguishing FDI from portfolio investment
- Equity Linkage: Instruments convertible to or representing equity shares qualify as FDI
- Banking Capital vs FDI: NRE/NRO deposits are banking transactions, not productive investments
Question 2 of 5 FDI and FPI
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