UPSC CSE Prelims 2021

Correct Option

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 signifies a lasting interest and control by the foreign investor over the domestic enterprise.

1. Foreign Currency Convertible Bonds (FCCBs): These are debt instruments issued by an Indian company in foreign currency, which can be converted into equity shares of the issuing company at a future date. Once converted into equity, they represent direct ownership and are therefore classified as FDI.
2. Foreign Institutional Investment (FII) with certain conditions: While FIIs (now largely subsumed under Foreign Portfolio Investment - FPI) typically involve portfolio investments without significant control, if a foreign investor (or a group of related investors) acquires 10% or more of the paid-up equity capital of an Indian company, or 10% or more of the value of paid-up equity capital of each series of convertible debentures or warrants or preference shares, it is treated as FDI. This threshold indicates a significant ownership stake and potential for management influence.
3. Global Depository Receipts (GDRs): These are financial instruments issued by an international depository bank, representing shares of a foreign company (in this context, an Indian company) that are traded on a local stock exchange. When foreign investors purchase GDRs, they are essentially acquiring equity shares of the Indian company, thereby constituting a direct investment in the company's capital.

Incorrect Options

1. Non-Resident External (NRE) Deposits: These are bank accounts maintained in India by Non-Resident Indians (NRIs) to deposit their foreign earnings. NRE deposits are essentially bank liabilities and represent debt, not equity ownership or a controlling stake in a company. Therefore, they are classified as external commercial liabilities and do not fall under the purview of Foreign Direct Investment.