With reference to Foreign Direct Investment in India, which one of the following is considered its major characteristic ?

(a) It is the investment through capital instruments essentially in a listed company.
(b) It is a largely non-debt creating capital flow. ✓ UPSC's answer
(c) It is the investment which involves debt-servicing.
(d) It is the investment made by foreign institutional investors in the Government securities.

Why the answer is (b)

• FDI is investment in equity or equity-like capital instruments that gives a lasting interest and a say in management; the investor shares in profits and risks rather than being owed a fixed repayment.

• It is therefore a largely non-debt-creating capital flow, unlike external commercial borrowings or NRI deposits — option (b).

• Option (a) is wrong: FDI is defined as 10%+ in a listed company or any investment in an unlisted company, so it is not 'essentially' in listed companies.

• Option (c) describes debt flows; option (d) describes FPI in G-secs.

• Hence option (b).

Why the other options are wrong

(a) It is the investment through capital instruments essentially in a listed company.: FDI covers unlisted companies too; listing is not its essence.
(c) It is the investment which involves debt-servicing.: Debt servicing characterises borrowings, not FDI.
(d) It is the investment made by foreign institutional investors in the Government securities.: FII investment in G-secs is portfolio investment, not FDI.

Asked in the GS Paper I of the UPSC Civil Services Preliminary Examination 2020, held on 4 October 2020. Question and answer key: Union Public Service Commission. Explanation: UPSC Answer Check.