Question
Q7. 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 Investment?
a : 1 , 2 and 3
b : 3 only
c : 2 and 4
d : 1 and 4
Answer: A
Detailed Explanation
• FDI refers to the purchase of assets in the rest of the world which allows control over the assets, e g, purchase of firms by Reliance in the United States.
• On the recommendation of the Mayaram panel, the following definition for FDI was adopted:
o Any foreign investment equal to or beyond (≥) 10 percent stake in post issue paid-up equity capital on a fully diluted basis in a listed company is construed as EDI.
o Further, any investment in an unlisted entity (even if it is only 1 or 2 percent of paid-up capital) is treated as FDI.
• A foreign currency convertible bond (FCCB) is a type of convertible bond issued in a currency different than the issuer’s domestic currency. In other words, the money being raised by the issuing company is in the form of foreign currency. A convertible bond is a mix between a debt and equity instrument.
• Since these bonds are convertible in to equity shares over a period of time as provided in the instrument, therefore they are covered under FDI policy.
• A Depositary receipt is a negotiable a financial instrument issued by a bank which represents, foreign company’s publicly traded securities.
• American Depository Receipts (ADR) – In the case of ADR, it is issued by the US bank that represents securities of a foreign company trading in the US stock market.
• ADR is denominated US$, and through this the US investors can invest in non-US companies.
• ADRs can be transferred without any stamp duty.
• RBI publishes ADRs/GDRs as Portfolio Investment.
• However, FEMA as well as the Department for Promotion of Industry and Internal Trade (DPIIT) under the Ministry of Commerce and Industry, treats ADR/GDR as FDI.
