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Q37 (IAS/2021) Economy › External Sector & Trade › Foreign direct investment Official Key

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?

Result
Your answer: —  ·  Correct: A
Explanation

The correct answer is Option 1 (1, 2 and 3). This classification is based on the Department for Promotion of Industry and Internal Trade (DPIIT) guidelines and the Arvind Mayaram Committee recommendations on defining FDI and FPI.

  • Foreign Currency Convertible Bonds (FCCBs) and Global Depository Receipts (GDRs): These are considered FDI because they represent foreign investment into the equity capital of an Indian company through hybrid or secondary market instruments issued abroad.
  • Foreign Institutional Investment (FII): According to the Mayaram Committee, if an FII invests 10% or more of the post-issue paid-up equity capital of an Indian company, it is reclassified as FDI. Thus, under "certain conditions," FII is included in FDI.
  • Non-Resident External (NRE) Deposits: These are classified as Banking Capital under the Capital Account of the Balance of Payments. They represent debt liabilities of the banking system rather than direct investment into the equity of an enterprise, and are therefore excluded from FDI.
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Q. Consider the following: 1. Foreign currency convertible bonds 2. Foreign institutional investment with certain conditions 3. Global depo…
At a glance
Origin: Books + Current Affairs Fairness: Moderate fairness Books / CA: 5/10 · 5/10
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This question separates surface-level readers from conceptual thinkers. While books often list FCCBs under 'Debt/ECB', the 'convertible' nature allows them to morph into FDI. The core test is distinguishing 'Investment in Companies' (FDI/FPI) from 'Banking Capital' (NRE Deposits).

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
Can foreign currency convertible bonds (FCCBs) be included as foreign direct investment (FDI) in India under the Indian FDI policy as of 2021?
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 > Debt Instruments > p. 100
Presence: 5/5
“External Commercial Borrowing (ECB): ECBs are commercial loans/debt raised by 'resident' entities from 'non-resident' entities. It can be in foreign currency or Indian rupee denominated. ECBs include bank loans, bonds, debentures, preference shares (other than fully and compulsorily convertible instruments), trade credits, Foreign Currency Convertible Bonds (FCCB), Financial Lease. Masala Bonds are a kind of ECB where the bonds are issued outside India but denominated in Indian Rupees, rather than the local currency. Masala is an Indian word and it means spices. Unlike dollar bonds, where the borrower takes the currency risk, Masala bond makes the investors bear the currency risk. • ECB: $1 Bond was issued to foreign investor; MASALA Bonds: Rs.”
Why this source?
  • Explicitly classifies Foreign Currency Convertible Bonds (FCCB) as part of External Commercial Borrowings (ECBs).
  • Describes ECBs as commercial loans/debt raised by resident entities from non-resident entities, implying FCCBs are treated as debt instruments.
  • Being categorized as ECB (debt) suggests FCCBs are not treated as equity-based FDI.
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 in terms of equity: investment through capital instruments in an unlisted Indian company or 10% or more of equity in a listed company.
  • Emphasizes equity/ownership threshold as determinant of FDI classification, which debt instruments like bonds do not satisfy.
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