Foreign Direct Investment (FDI) refers to the investment made by a foreign entity in a country`s economy. It involves a long-term commitment and is typically associated with the establishment of a business or the acquisition of a substantial amount of ownership in an existing enterprise.

Option 1, where a foreign company buys shares in stock exchanges in India, does not qualify as FDI. This is because buying shares in the stock market does not involve a direct investment in the Indian economy.

Option 2, where a foreign country pension fund invests in Indian stock markets, also does not qualify as FDI. Investing in stock markets is considered portfolio investment, which does not involve a direct stake in the Indian economy.

Option 3, where a foreign merchant banker buys shares from Indian stock markets, is also not considered FDI. Similar to option 1, this is a form of portfolio investment rather than a direct investment in the Indian economy.

The correct answer is option 4, where a foreign entity sets up an educational institution in India. This is considered FDI because it involves a long-term commitment and the establishment of a business in the Indian economy.