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?
- 1, 2 and 3
- 3 only
- 2 and 4
- 1 and 4
Answer: a) 1, 2 and 3
Foreign Direct Investment (FDI)
- Foreign direct investment (FDI) is a type of cross-border investment in which an investor from one country establishes a lasting interest in an enterprise in another country.
- FDI can take various forms, such as acquiring shares, establishing a subsidiary or a joint venture, or providing loans or technology transfers.
- FDI is considered to be a key driver of economic growth, as it can bring in capital, technology, skills, market access and employment opportunities to the host country.
- It is different from foreign portfolio investment where the foreign entity merely buys equity shares of a company.
- Foreign Portfolio Investment is any investment made by a person resident outside India in capital instruments where such investment is
- (a) less than 10 percent of the post issue paid-up equity capital on a fully diluted basis of a listed Indian company or
- (b) less than 10 percent of the paid up value of each series of capital instruments of a listed Indian company.
- It is the percentage which defines whether it is direct or institutional investment.
- FII made above 10 percent of the post issue paid-up equity capital will be considered as FDI. But Once an FDI always an FDI.
- Foreign Portfolio Investment is any investment made by a person resident outside India in capital instruments where such investment is
- In FDI, the foreign entity has a say in the day-to-day operations of the company.
- It is a major source of non-debt financial resources for the economic development of a country.
- FDI generally takes place in an economy which has the prospect of growth and also a skilled workforce.
- FDI has developed radically as a major form of international capital transfer since the last many years.
- The advantages of FDI are not evenly distributed. It depends on the host country’s systems and infrastructure.
- The determinants of FDI in host countries are:
- Policy framework
- Rules with respect to entry and operations/functioning (mergers/acquisitions and competition)
- Political, economic and social stability
- Treatment standards of foreign affiliates
- International agreements
- Trade policy (tariff and non-tariff barriers)
- Privatisation policy
- Foreign investment in Indian securities has been made possible through the purchase of Global Depository Receipts, Foreign Currency Convertible Bonds and Foreign Currency Bonds issued by Indian issuers which are listed, traded and settled overseas.
- ‘Foreign Currency Convertible Bond’ (FCCB) is a bond issued under the Issue of Foreign Currency Convertible Bonds and Ordinary Shares (Through Depository Receipt Mechanism) Scheme, 1993, as amended from time to time.
- Automatic Route for Issue of Foreign Currency Convertible Bonds (FCCBs) is allowed.
- ‘Foreign Currency Convertible Bond’ (FCCB) is a bond issued under the Issue of Foreign Currency Convertible Bonds and Ordinary Shares (Through Depository Receipt Mechanism) Scheme, 1993, as amended from time to time.
- A Non-Resident External (NRE) account is a rupee dominated account opened by an NRI to facilitate deposit of foreign currency earnings. It is not an FDI.