Question 2 from UPSC CSE 2021 - Economics

Question

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?

IASCODEX · Accepted Answer

Correct Option: A. 1, 2, and 3

Strategy: Select instruments that represent direct equity investment in Indian companies. Include FCCBs, GDRs, and FIIs that meet ownership and control criteria. Exclude NRE deposits as they are a form of external borrowing, not equity.

Key Info: Foreign Direct Investment (FDI) denotes investments from non-residents where there is equity stake and control in a company located in a different country.

**Key Instruments**

*   **Foreign Currency Convertible Bonds (FCCBs):** These are debt instruments issued by Indian companies in a foreign currency, which can be converted into equity shares of the issuing company. The conversion option means they are classified under FDI when exercised, as the investor gains an ownership stake.

*   **Foreign Institutional Investment (FII):** Investments by foreign institutional investors are usually classified as Foreign Portfolio Investment (FPI). However, when FIIs acquire more than the prescribed threshold (typically 10%) or meet other specified conditions of equity and control, their investment is categorized as FDI under Indian regulations.

*   **Global Depository Receipts (GDRs):** These are negotiable certificates issued outside India by depository banks, representing shares of an Indian company. GDRs that grant the holder voting rights in the issuing company amount to an equity holding and, thus, are counted as FDI.

*   **Non-Resident External (NRE) Deposits:** These are Indian rupee-denominated bank accounts available to non-resident Indians (NRIs). Funds deposited are repatriable and can be freely converted between rupees and foreign currency, but such deposits are classified as external debt for the country, not as equity investments. Thus, they do not form part of FDI.

**Balance of Payments Context**

The capital account covers various forms of cross-border capital movements, including FDI, FPI, external commercial borrowings, NRE deposits, and external assistance. Among these, only those vehicles that confer significant equity ownership or control in Indian companies are considered FDI.

IASCODEX · Answer

Option B: 3 only

IASCODEX · Answer

Option C: 2 and 4

IASCODEX · Answer

Option D: 1 and 4

Consider the following: Foreign Currency Convertible Bonds Foreign Institutional Investment with certain conditions Global Depository Receipts Non-resident External Deposits Which of the above can be included in Foreign Direct Investments?

Consider the following:

Foreign Currency Convertible Bonds

Foreign Institutional Investment with certain conditions

Global Depository Receipts

Non-resident External Deposits
Which of the above can be included in Foreign Direct Investments?