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?
- (a) 1, 2 and 3 ✓ UPSC's answer
- (b) 3 only
- (c) 2 and 4
- (d) 1 and 4
Why the answer is (a)
• India's FDI policy (Consolidated FDI Policy and FEMA rules) counts as FDI any foreign investment in equity or equity-like instruments that confers a lasting interest.
• Foreign currency convertible bonds (convertible into equity) and global depository receipts (representing underlying shares) are treated as FDI (items 1 and 3).
• Foreign institutional/portfolio investment is generally portfolio investment, but the RBI's framework treats FPI holdings above 10% in a company as FDI — hence 'with certain conditions' (item 2).
• Non-resident external deposits are bank deposits, a debt flow, and are not FDI (item 4).
• Hence 1, 2 and 3, option (a).
Why the other options are wrong
- (b) 3 only
- FCCBs and conditional FII holdings also count as FDI.
- (c) 2 and 4
- NRE deposits are debt, not FDI; FCCBs and GDRs are FDI.
- (d) 1 and 4
- NRE deposits are not FDI; GDRs and conditional FII are.
Asked in the GS Paper I of the UPSC Civil Services Preliminary Examination 2021, held on 10 October 2021. Question and answer key: Union Public Service Commission. Explanation: UPSC Answer Check.