Foreign Exchange, FDI & External Debt (Part – II)

Foreign Direct Investments (FDI) means investment through capital instruments by a person resident outside India (a) in an Unlisted Indian Company; or (b) in ten percent or more of the post issue paid-up equity capital on a fully diluted basis of a listed Indian company. Hence, option (a) is incorrect.

FDI infuses long term sustainable capital in the economy and contributes towards technology transfer, development of strategic sectors, greater innovations, competition and employment creation amongst other benefits. So, it is considered as a major source of non-debt financial resources for the economic development. Hence, option (b) is the correct answer.

The foreign direct investment can be made in 'Capital Instrument', i.e. in equity shares, debentures, preference shares and share warrants issued by Indian company, but not in the Government securities. Hence, option (d) is incorrect.

FDI do not involve debt-servicing. Debt service is the cash that is required to cover the repayment of interest and principal on a debt for a particular period. While FDI contributes towards technology transfer, innovation, competition, skills and employment creation etc. Hence, option (c) is also incorrect.

Foreign investment has two components, namely, Foreign Direct Investment (FDI) and Foreign Portfolio Investment (FPI). Foreign Direct Investment (FDI) is the investment through capital instruments by a person resident outside India (a) in an unlisted Indian company; or (b) in 10 percent or more of the post issue paid-up equity capital on a fully diluted basis of a listed Indian company. Subsidiaries of for. companies in India, majority foreign holding in Indian companies and companies exclusively financed by foreign companies would include FDI in India. Foreign Portfolio Investment (FPI) 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 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 investments of a listed Indian company.

Foreign Currency Convertible Bond' (FCCB) means 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. Since these bonds are convertible into equity shares over a period of time, therefore inward remittances received by the Indian company vide issuance of FCCBs are treated as FDI. 'Foreign Institutional Investors' (FIIs) are allowed to invest in the primary and secondary capital markets in India through the Portfolio Investment Scheme (PIS). Under this scheme, FIIs can acquire shares/debentures of Indian companies through the stock exchanges in India. The ceiling for overall investment for Flls is 24 percent of the paid-up capital of the Indian company. Foreign Institutional Investment with certain conditions (e.g. in convertible debentures) is counted as FDI. In case, the total holding of a portfolio investment increases to 10 percent or more of the total paid-up equity capital on a fully diluted basis, the total investment so made will be re-classified as FDI, subject to certain conditions as specified by SEBI in this regard.

'Depository Receipt' (DR) means a foreign currency denominated instrument whether listed on an international exchange or not, issued by a foreign depository in a permissible jurisdiction on the back of eligible securities

issued or transferred to that foreign depository and deposited with a domestic custodian and includes 'Global Depository Receipt' (GDR) as defined in the Companies Act, 2013. Depository Receipts such as ADR and GDR are treated as FDI. Non-resident external deposits are not treated as FDI as they are debt creating inflows. NRIs/PIOs are allowed to invest in the primary and secondary capital markets in India through the PIS. The ceiling for investment for NRIs/PIOs is 10 percent of the paid-up capital of the Indian company.

Hence, statements 1, 2 and 3 are correct while statement 4 is incorrect.

All statements are correct except statement 3. Scheme FCNR (A) was launched in 1975 to encourage NRI deposits. The RBI guaranteed the exchange rate prevalent at the time of a deposit to eliminate risk to depositors. It was withdrawn in 1993. FCNR (B) was started in place of FCNR (A) on 15 May, 1993. At present, FCNR account stands for Foreign Currency Non-Resident Bank (B) Account. It is a kind of fixed deposit account opened for depositing income earned overseas. The account is held in foreign currency. An FCNR-B account allows NRIs to invest foreign currency in term deposits in India and earn tax-free interest. They can benefit from higher interest rates in India while holding their deposits in a foreign currency, thus protecting them agains exchange rate fluctuations.

Excess Portfolio Investment by the foreigners was the main reason of crisis in East Asian and Latin American countries. Such investments are highly volatile and as opposite to it Foreign Direct Investment (FDI) is stable in nature. FDI plays an effective role in the development of country. FDI is most effective and useful source of foreign capital in hosting country. FDI accelerates growth process mainly due to superior technology transfers and greater competition that generally accompany FDI. FDI also improves export competitiveness of the country, FDI reflects seriousness and commitment on part of foreign investors since FDI causes high initial setup cost and higher exit costs in terms of difficulty in selling stake in the firm. Thus, foreign direct investor stay invested for long-term in the country and so help to improve growth prospects of the host country.

Foreign Direct Investment is stable in nature as compared to investments by Foreign Institutional Investor (FII). FDI is helpful in bringing better Management skills and Technology transfer whereas FII brings only capital. FII functions primarily in secondary market. Thus option (a), (c) and (d) are incorrect. FIIs are conducive for increase in availability of foreign capital at comprehensive level, even though they are short-termed and buoyant by nature, while FDI only targets specific sectors. Hence, option (b) is the correct answer.

Among the given options, the purchase of bonds or stocks issued by Pharma Company overseas is not an example of foreign direct investment (FDI), while the other three are examples of FDI.

A Participatory Note (P-note or PN) is an instrument issued by a registered Foreign Institution Investor (FII) to an over- seas investor who wishes to invest in Indian stock markets without registering themselves with the market regulator SEBI. These notes are a unique Indian invention started in 2000 by SEBI to enable foreign corporates and high networth investors enter the Indian market without having to go through the process of registering as FII.

P-Notes or Participatory Notes are Overseas Derivative Instruments that have Indian Stocks as their underlying assets. They allow foreign investors to buy stocks listed on Indian exchanges without being registered. P-Notes are issued by foreign portfolio investors (FPIs) registered with SEBI, to overseas investors who want to be part of the Indian stock market without registering themselves directly. The instrument gained popularity as FIls, to avoid the formalities of registering and to remain anonymous, started betting on stocks through this route.

Limit of investment in outstanding corporate bonds for Foreign Portfolio Investment (FPI) in Union Budget 2020-21 had been extended upto 15% from the previous upto 9%. The limits for FPI investment in corporate bonds shall remain unchanged at 15% of outstanding stock of securities for FY 2023-24 and 2024-25. The limits for FPI investment in Government securities (G-secs) and State Development Loans (SDLs) are at 6% and 2% respectively.