This is a foundational Economy concept found in Class 12 Macroeconomics and every standard reference book (Vivek Singh, Singhania). It tests the core distinction between 'Equity' (Risk capital) and 'Debt' (Liability). The question is fair and rewards conceptual clarity over rote memorization of data.
How this question is built
This question can be broken into the following sub-statements.
Tap a statement sentence to jump into its detailed analysis.
Statement 1
Is Foreign Direct Investment (FDI) in India defined as investment through capital instruments essentially in a listed company?
Origin: Weak / unclear
Fairness: Borderline / guessy
Indirect textbook clues
Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > 2.23 Foreign Investment > p. 97
Strength: 5/5
“If the warrant holder does not exercise his option to subscribe to equity shares, then the initial amount (some percent of the total amount paid by the warrant holder to purchase the warrant) paid stands forfeited.• Foreign investment can be broadly classified into two ways: • Foreign Direct Investment (FDI) is the investment through 'capital instruments' by a person resident outside India: • In an unlisted Indian company; or• In 10 percent or more of the equity capital of a listed Indian company• Foreign Portfolio Investment (FPI) is any investment made by a person resident outside India in 'capital instruments' where such investment is less than 10 percent of the equity capital of a listed Indian company.• Foreign Portfolio Investors (FPIs) can also invest in Central and State Government securities/bonds and corporate bonds and are treated as debt.• Foreign Direct Investment can come through two routes viz. automatic and government approval route.”
Why relevant
Gives an explicit rule: FDI is investment through 'capital instruments' either in an unlisted Indian company or in 10% or more of the equity capital of a listed Indian company.
How to extend
A student can combine this with the claim to note that FDI is not limited to listed companies (it includes unlisted ones) and check the 10% threshold for listed firms.
Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 16: Balance of Payments > 1. FDI > p. 475
Strength: 5/5
“• It refers to the purchase of assets in the rest of the world which allows control over the \bulletassets, e.g., purchase of firms by Reliance in the United States.• On the recommendation of the Mayaram panel, the following definition for FDI was adopted: ö • Any foreign investment equal to or beyond (2) 10 per cent stake in post-issue paida. up equity capital on a fully diluted basis in a listed company is construed as FDI.• b”
Why relevant
States the Mayaram panel recommendation: any foreign investment equal to or beyond 10% stake in post‑issue paid‑up equity in a listed company is construed as FDI.
How to extend
Use this 10% rule plus basic knowledge of shareholding to test whether an investment in a listed company below 10% would qualify as FDI (it would not).
Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 16: Balance of Payments > 2. Portfolio Investment > p. 477
Strength: 4/5
“It refers to purchase of an asset in the rest of the world without any control over the same (i.e., having less than 10% share in a listed company). In the case of an unlisted company, any quantum of investment is termed FDI. Example of portfolio investment - Purchase of some shares of a foreign company by Reliance or even by an individual in the rest of the world. This investment instrument is more easily traded, and it does not represent a long-term interest; hence it is less permanent in nature. Portfolio investment can be classified into two categories: • Foreign institutional investment (FII) a. • Investment through depository receipts (ADR/GDR/IDR) \mathbf{b}.”
Why relevant
Explains the practical distinction: less than 10% in a listed company is portfolio investment; in an unlisted company any quantum is termed FDI.
How to extend
Combine with a concrete example (e.g., a foreign investor buys 5% of a listed firm's shares) to conclude that such an investment would be FPI, not FDI.
Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > 2.23 Foreign Investment > p. 99
Strength: 4/5
“• Foreign Direct Investment (FDI): It happens generally through primary market.; Foreign Portfolio Investment (FPI): Generally, through secondary market but can • Foreign Direct Investment (FDI): ; Foreign Portfolio Investment (FPI): happen through primary market as well • Foreign Direct Investment (FDI): Generally new shares are issued and the capital; Foreign Portfolio Investment (FPI): Generally, only the owners change hands and • Foreign Direct Investment (FDI): comes to the company through which the; Foreign Portfolio Investment (FPI): new capital does not come to the company • Foreign Direct Investment (FDI): company invests in new factory, machines etc.; Foreign Portfolio Investment (FPI): • Foreign Direct Investment (FDI): The foreign investor appoints Board of Directors; Foreign Portfolio Investment (FPI): Foreign investors generally do not get involved in • Foreign Direct Investment (FDI): and get involved in the decision making (active; Foreign Portfolio Investment (FPI): the management of the company and purchase • Foreign Direct Investment (FDI): management) of the company by purchase of; Foreign Portfolio Investment (FPI): minority stakes • Foreign Direct Investment (FDI): large shareholdings; Foreign Portfolio Investment (FPI): • Foreign Direct Investment (FDI): Foreign investors try to make the company; Foreign Portfolio Investment (FPI): Foreign investors target the share price of the • Foreign Direct Investment (FDI): profitable through their decision making and; Foreign Portfolio Investment (FPI): company and derive their gain from change of • Foreign Direct Investment (FDI): target the profit of the company; Foreign Portfolio Investment (FPI): share prices • Foreign Direct Investment (FDI): It is sector specific.”
Why relevant
Describes FDI as generally through the primary market with new shares issued, entailing control/management involvement — characteristics distinct from portfolio flows.
How to extend
A student can check whether the questioned definition (essentially in a listed company) captures these features (it does not address primary issuance or control).
Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 17: India’s Foreign Exchange and Foreign Trade > 2020 > p. 508
Strength: 3/5
“• 1. With reference to Foreign Direct Investment in India, which one of the following is considered its major characteristics? • (a) It is the investment through capital instruments essentially in a listed company. • (b) It is largely non-debt creating capital flow. • (c) It is the investment which involves debt-servicing. • (d) It is the investment made by foreign institutional investors in the Government Securities. 2 Select the correct answer using the code given below: • (a) 1 only • (b) 1 and 2 only • (c) 3 only • (d) 1, 2 and 3 2019 No question \begin{array}{|c|c|c|c|c|c|c|c|c|c|c|c|c|c|c|c|c|c|c • 4.”
Why relevant
Shows that the proposition 'FDI is investment through capital instruments essentially in a listed company' appears as a multiple‑choice option, implying it's a contested or testable statement.
How to extend
Use the surrounding answer choices (e.g., non‑debt creating nature) and the correct answer key (from course materials) to judge the option's accuracy against formal definitions.
Statement 2
Is Foreign Direct Investment (FDI) in India largely a non-debt-creating capital flow?
Origin: Direct from books
Fairness: Straightforward
Book-answerable
From standard books
Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 16: Balance of Payments > IRVE > p. 487
Presence: 5/5
“Balance of Payments - annual statement of accounts of monetary transactions of the Current Account and Balance in Capital Account - involves vertical double-entry system of accounting - BOP in India is compiled on accrual basis. Balance in Current Account - transactions relating to goods, services and income by the Balance of Invisibles. • Balance in Capital Account Capital Receipts and Payments Foreign Investments (FDI and FII), Loans (External Assistance, ECB and Trade Credit) and Banking Capital. • FDI non-debt-creating capital transactions two types Brownfield and Greenfield Indian Company may receive FDI under two routes - automatic route and government route. • Borrowings debt creating capital transactions types include External Commercial \bulletBorrowings, External assistance and Trade Credit EXAMPLE Previous Years' Preliminary Examination Questions”
Why this source?
- Explicitly classifies FDI as a non-debt-creating capital transaction within the Balance of Payments context.
- Contrasts FDI with borrowings by listing borrowings (ECB, external assistance, trade credit) under debt-creating flows.
Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > 2.23 Foreign Investment > p. 97
Presence: 4/5
“If the warrant holder does not exercise his option to subscribe to equity shares, then the initial amount (some percent of the total amount paid by the warrant holder to purchase the warrant) paid stands forfeited.• Foreign investment can be broadly classified into two ways: • Foreign Direct Investment (FDI) is the investment through 'capital instruments' by a person resident outside India: • In an unlisted Indian company; or• In 10 percent or more of the equity capital of a listed Indian company• Foreign Portfolio Investment (FPI) is any investment made by a person resident outside India in 'capital instruments' where such investment is less than 10 percent of the equity capital of a listed Indian company.• Foreign Portfolio Investors (FPIs) can also invest in Central and State Government securities/bonds and corporate bonds and are treated as debt.• Foreign Direct Investment can come through two routes viz. automatic and government approval route.”
Why this source?
- Defines FDI as investment through 'capital instruments' (equity stakes/unlisted company investments), implying equity rather than debt.
- Specifies equity thresholds (10%+) used to distinguish FDI from portfolio investments, reinforcing its capital (non-debt) nature.
Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 16: Balance of Payments > b. Depository Receipt > p. 478
Presence: 3/5
“Indian brokers who are registered with SEBI buy India-based securities or shares and then issue PNs to foreign investors. PN owner does not own the shares. FDI | FII • FDI is an investment that a parent company makes in a foreign country. It only targets a specific enterprise and aims to increase the enterprise's capacity or productivity or change its management control. • FII is an investment made by an investor in the markets of a foreign nation. FII investment flows only into the secondary market. It helps in increasing capital availability. Ab ha could”
Why this source?
- Differentiates FDI from foreign institutional investment by describing FDI as targeting a specific enterprise and changing management or capacity—characteristics of equity investment.
- Frames FII as secondary-market investment, implying that FDI's enterprise-focused capital is not the same as debt instruments.
Statement 3
Does Foreign Direct Investment (FDI) in India typically involve debt-servicing obligations?
Origin: Direct from books
Fairness: Straightforward
Book-answerable
From standard books
Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > 2.23 Foreign Investment > p. 97
Presence: 5/5
“If the warrant holder does not exercise his option to subscribe to equity shares, then the initial amount (some percent of the total amount paid by the warrant holder to purchase the warrant) paid stands forfeited.• Foreign investment can be broadly classified into two ways: • Foreign Direct Investment (FDI) is the investment through 'capital instruments' by a person resident outside India: • In an unlisted Indian company; or• In 10 percent or more of the equity capital of a listed Indian company• Foreign Portfolio Investment (FPI) is any investment made by a person resident outside India in 'capital instruments' where such investment is less than 10 percent of the equity capital of a listed Indian company.• Foreign Portfolio Investors (FPIs) can also invest in Central and State Government securities/bonds and corporate bonds and are treated as debt.• Foreign Direct Investment can come through two routes viz. automatic and government approval route.”
Why this source?
- Defines FDI as investment through 'capital instruments' into an Indian company, implying equity rather than loan funding.
- Specifies thresholds (unlisted company or ≥10% equity in listed company), reinforcing that FDI is ownership/equity-based.
Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > 2.23 Foreign Investment > p. 99
Presence: 5/5
“It results in exchange rate volatility • Foreign Direct Investment (FDI): It can happen in three ways viz. by purchase of; Foreign Portfolio Investment (FPI): It happens through purchase of shares • Foreign Direct Investment (FDI): shares, by forming a Joint Venture company or; Foreign Portfolio Investment (FPI): • Foreign Direct Investment (FDI): by establishing a subsidiary company; Foreign Portfolio Investment (FPI): India receives maximum FDI from Singapore, Mauritius and US. Karnataka, Maharashtra and Delhi are the top recipient of FDI. Following chart represents FDI inflow in India in the last few years in billion dollars. The following are few other ways which are used to raise finance from abroad:”
Why this source?
- Lists primary modes of FDI as purchase of shares, forming a joint venture, or establishing a subsidiary — all equity forms.
- Contrasts these FDI modes with other foreign investment types, emphasizing non-debt character of FDI transactions.
Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 16: Balance of Payments > b. Depository Receipt > p. 478
Presence: 4/5
“Indian brokers who are registered with SEBI buy India-based securities or shares and then issue PNs to foreign investors. PN owner does not own the shares. FDI | FII • FDI is an investment that a parent company makes in a foreign country. It only targets a specific enterprise and aims to increase the enterprise's capacity or productivity or change its management control. • FII is an investment made by an investor in the markets of a foreign nation. FII investment flows only into the secondary market. It helps in increasing capital availability. Ab ha could”
Why this source?
- Differentiates FDI from portfolio/foreign institutional investment, noting that portfolio investors can invest in government/corporate bonds and are treated as debt.
- By contrast, presents FDI as targeted enterprise investment focusing on capacity, control and equity, not bond-like debt instruments.
Statement 4
Are investments by foreign institutional investors in Government securities classified as Foreign Direct Investment (FDI) in India?
Origin: Direct from books
Fairness: Straightforward
Book-answerable
From standard books
Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > 2.23 Foreign Investment > p. 97
Presence: 5/5
“If the warrant holder does not exercise his option to subscribe to equity shares, then the initial amount (some percent of the total amount paid by the warrant holder to purchase the warrant) paid stands forfeited.• Foreign investment can be broadly classified into two ways: • Foreign Direct Investment (FDI) is the investment through 'capital instruments' by a person resident outside India: • In an unlisted Indian company; or• In 10 percent or more of the equity capital of a listed Indian company• Foreign Portfolio Investment (FPI) is any investment made by a person resident outside India in 'capital instruments' where such investment is less than 10 percent of the equity capital of a listed Indian company.• Foreign Portfolio Investors (FPIs) can also invest in Central and State Government securities/bonds and corporate bonds and are treated as debt.• Foreign Direct Investment can come through two routes viz. automatic and government approval route.”
Why this source?
- Defines FDI vs foreign portfolio investment (FPI) thresholds and instruments (FDI = capital instruments with control; FPI = portfolio stakes).
- Explicitly notes FPIs can invest in Central and State Government securities and that such investments are treated as debt.
Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > Indian Govt. securities will very soon join Global Bond Index > p. 48
Presence: 5/5
“This investment by foreigners will be treated as Govt. of India's external Debt.• More investment by foreigners in the Govt. of India bonds will lead to a lesser interest rate on Govt. bonds and hence lesser yield and this will also increase liquidity (more trade and easy conversion into cash) in Indian Govt. securities. This will also ease pressure on Govt. borrowing from the domestic market and hence domestic interest rate and yield will also come down.• Right now, when foreign investors (NRIs, FPIs) purchase corporate bonds or Govt. bonds in India then they require approval from SEBI. But if an investor wants to invest in Govt. securities through Global Bond Index, then this prior approval from SEBI needs to be removed.• Earlier there was a cap/ceiling as to how much non-residents (foreign) investors can invest in bonds in India.”
Why this source?
- States that foreign investment in Government of India bonds is treated as the Government's external debt.
- Refers to foreign investors (NRIs, FPIs) purchasing government bonds and the regulatory approval regime for such purchases.
Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 16: Balance of Payments > a. Foreign Institutional Investment (FII) > p. 477
Presence: 3/5
“• It includes investment in the securities of any other nation's company by foreign individuals and foreign institutional investors. FII is mostly made in the financial markets.• FII is short term in nature and is also known as 'hot money'.• FIIs in India are regulated by the Securities and Exchange Board of India (SEBI).”
Why this source?
- Describes foreign institutional investors (FIIs) as investors in securities and short-term 'hot money', implying portfolio nature of their flows.
- Notes FIIs are regulated by SEBI, consistent with portfolio-investment treatment rather than FDI classification.
Pattern takeaway:
UPSC Economy questions often demand 'Definitional Purism'. They present technical distractors (like Option A's 'essentially in a listed company') to confuse you, but the answer usually lies in the broad macroeconomic character of the term (Option B's 'non-debt nature').
How you should have studied
- [THE VERDICT]: Sitter. Direct hit from the 'Balance of Payments' chapter in standard texts (e.g., Vivek Singh Ch. 2, Singhania Ch. 16).
- [THE CONCEPTUAL TRIGGER]: Balance of Payments > Capital Account classification > Distinguishing 'Debt-creating' (ECBs, NRI Deposits) vs. 'Non-debt creating' (FDI, FPI) flows.
- [THE HORIZONTAL EXPANSION]: 1. FDI Definition: Investment in unlisted company OR ≥10% equity in listed company (post-Mayaram Committee). 2. FPI Definition: <10% equity in listed company; no management control. 3. Prohibited Sectors: Gambling, Lottery, Atomic Energy, Nidhi Companies, Chit Funds. 4. Instruments: Compulsorily Convertible Debentures (CCDs) count as FDI (Equity); Non-Convertible Debentures count as Debt (ECB).
- [THE STRATEGIC METACOGNITION]: Do not just memorize 'FDI limits'. Categorize every capital inflow by its *liability nature*. Ask: 'Does this create a fixed obligation to pay interest?' If No = Non-debt creating (FDI/Equity). If Yes = Debt creating (Loans/Bonds).
Concept hooks from this question
👉 FDI vs FPI: 10% ownership threshold
💡 The insight
FDI is distinguished from portfolio investment by a 10% equity stake threshold for listed companies and by any quantum in unlisted companies.
High-yield definitional concept tested in MCQs and descriptive questions on foreign investment; it clarifies control vs portfolio nature of flows, links to balance of payments classification and regulatory treatment, and helps answer questions about how investments are categorized and their macroeconomic implications.
📚 Reading List :
- Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > 2.23 Foreign Investment > p. 97
- Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 16: Balance of Payments > 2. Portfolio Investment > p. 477
- Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 16: Balance of Payments > 1. FDI > p. 475
🔗 Anchor: "Is Foreign Direct Investment (FDI) in India defined as investment through capita..."
👉 Primary vs Secondary Market distinction for FDI and FPI
💡 The insight
FDI generally involves issuance of new shares (primary market) while FPI mostly involves purchases in the secondary market.
Useful to explain permanence of capital, impact on company funds and management control, and to differentiate policy implications of different capital flows; enables tackling questions on market mechanisms and effects of foreign inflows.
📚 Reading List :
- Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > 2.23 Foreign Investment > p. 99
🔗 Anchor: "Is Foreign Direct Investment (FDI) in India defined as investment through capita..."
👉 FDI entry routes and regulatory reporting
💡 The insight
FDI enters under automatic or government approval routes and requires reporting/administration by DPIIT, RBI and SEBI/regulatory frameworks.
Important for questions on economic policy, FEMA/RBI procedures and administrative framework for foreign investment; helps in analyzing policy changes, approval processes and compliance requirements.
📚 Reading List :
- Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > 2.23 Foreign Investment > p. 97
- Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > 2.23 Foreign Investment > p. 98
🔗 Anchor: "Is Foreign Direct Investment (FDI) in India defined as investment through capita..."
👉 FDI as non-debt-creating capital flow
💡 The insight
FDI is treated in India’s BOP as capital inflows that are not debt obligations but equity/capital transactions.
High-yield for questions on capital flows and Balance of Payments: mastering this clarifies why FDI affects capital account differently from loans, aids in interpreting BOP tables, and helps answer questions comparing types of foreign capital.
📚 Reading List :
- Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 16: Balance of Payments > IRVE > p. 487
- Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > 2.23 Foreign Investment > p. 97
🔗 Anchor: "Is Foreign Direct Investment (FDI) in India largely a non-debt-creating capital ..."
👉 Distinction between FDI and FPI
💡 The insight
FDI involves direct equity stakes and enterprise control while FPI is portfolio/secondary-market investment and can include debt instruments.
Frequently tested in prelims/mains: understanding this distinction helps in questions on investment policy, implications for financial stability, and capital account classification; it connects to topics on SEBI/DPIIT rules and reporting requirements.
📚 Reading List :
- Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 16: Balance of Payments > b. Depository Receipt > p. 478
- Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > 2.23 Foreign Investment > p. 97
🔗 Anchor: "Is Foreign Direct Investment (FDI) in India largely a non-debt-creating capital ..."
👉 Balance of Payments classification: debt-creating vs non-debt capital flows
💡 The insight
The BOP separates non-debt-creating capital (like FDI) from debt-creating flows (external borrowings, trade credit, ECBs).
Essential for answering BOP and macroeconomy questions: mastering this concept helps candidates evaluate external vulnerability, exchange rate impacts, and policy responses to different capital inflows.
📚 Reading List :
- Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 16: Balance of Payments > IRVE > p. 487
🔗 Anchor: "Is Foreign Direct Investment (FDI) in India largely a non-debt-creating capital ..."
👉 FDI vs FPI/FII: Equity versus Debt
💡 The insight
FDI is equity-oriented investment into enterprise ownership while FPIs/FPIs can involve bond purchases treated as debt.
High-yield for UPSC because many questions probe the nature and balance-of-payments classification of capital flows; mastering this clarifies which foreign inflows create debt-servicing obligations and which do not. It links to topics like external debt, capital account, and policy responses to capital flow volatility.
📚 Reading List :
- Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > 2.23 Foreign Investment > p. 97
- Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 16: Balance of Payments > b. Depository Receipt > p. 478
🔗 Anchor: "Does Foreign Direct Investment (FDI) in India typically involve debt-servicing o..."
The 'Hybrid' Trap: Compulsorily Convertible Debentures (CCDs) are treated as FDI (Equity) because the debt *must* turn into shares. However, Optionally Convertible Debentures (OCDs) are treated as External Commercial Borrowings (Debt) until they actually convert. This nuance is the next logical question.
The 'Sinking Ship' Test: Ask yourself, 'If the Indian company goes bankrupt, does the foreign investor have a legal claim to be repaid?'
- For FDI (Equity), the answer is NO (they sink with the ship).
- For Debt, the answer is YES.
Option C implies repayment (Debt-servicing), so it's out. Option B says 'Non-debt', which aligns perfectly with the risk-sharing nature of FDI.
Mains GS-3 (Investment Models): India prefers FDI over ECBs because FDI shares the risk (dividends are only paid if profits exist), whereas Debt (ECBs) requires fixed interest payments even during a recession, stressing the Rupee. This links to 'Macroeconomic Stability'.