Prelims 2021

Q. 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
b) 3 only
c) 2 and 4
d) 1 and 4
Correct Answer: a) 1, 2 and 3

Question from UPSC Prelims 2021 GS Paper

Explanation : 

Foreign Direct Investment (FDI)

Foreign Direct Investment (FDI) refers to an investment made by a firm or individual in one country into business interests located in another country. It typically involves significant control over the company invested in and is a means to enter foreign markets. FDI is distinguished from Foreign Portfolio Investment (FPI), where investors passively hold securities from a foreign country without actively managing the assets or having control over the businesses.

Options for FDI

Foreign Currency Convertible Bonds (FCCBs): These are a type of convertible bond issued in a currency different than the issuer’s domestic currency. While FCCBs can be converted into equity shares at a later date, they are initially debt investments. If the bonds are converted into shares, the investment can then be considered as FDI because it results in foreign ownership and control in the company.

Foreign Institutional Investment (FII) with certain conditions: FIIs generally involve investing in securities and other financial assets by institutional investors in a country outside of where they are based. This is typically considered FPI. However, if the investment comes with certain conditions such as a strategic stake in the company, board representation, or other forms of control, it can be reclassified as FDI.

Global Depository Receipts (GDRs): GDRs are bank certificates issued in more than one country for shares in a foreign company. The shares are held by a foreign branch of an international bank, and the receipts represent ownership of these shares. GDRs allow investors to hold shares in foreign companies and trade them. When GDRs are converted into shares, the investment is similar to FDI because it results in foreign ownership and potentially control over the company.

Non-Resident External (NRE) Deposits: These are bank accounts that allow non-resident Indians (NRIs) to park their foreign earnings in India. The funds in NRE accounts are held in rupees, and the account is used for facilitating deposit of foreign earnings. This is not considered FDI because it does not lead to control or ownership in an Indian company; it is merely a financial account.

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