UPSC Prelims 2012 Q78: Indian Economy – External Sector & Balance Of Payments
Which of the following would include Foreign Direct Investment in India?
1. Subsidiaries of foreign companies in India
2. Majority foreign equity holding in Indian companies
3. Companies exclusively financed by foreign companies
4. Portfolio investment
Select the correct answer using the codes given below :
- (a) 1, 2, 3 and 4
- (b) 2 and 4 only
- (c) 1 and 3 only
- (d) 1, 2 and 3 only
Answer: (d) 1, 2 and 3 only
Explanation
What counts as Foreign Direct Investment (FDI)?
FDI is investment that gives the foreign investor a lasting interest and control in the business.
| Item | FDI? | Reason |
|---|---|---|
| 1. Subsidiaries of foreign companies in India | Yes | The parent owns and controls the Indian unit |
| 2. Majority foreign equity holding in Indian companies | Yes | A majority stake gives control |
| 3. Companies exclusively financed by foreign companies | Yes | Wholly foreign-owned |
| 4. Portfolio investment | No | It is Foreign Portfolio Investment: buying shares and bonds for returns, with no control |
FDI and portfolio investment compared:
| Point | FDI | Portfolio investment |
|---|---|---|
| Aim | Run the business | Earn returns |
| Stability | Long-term, stable | 'Hot money', can leave quickly |
| Threshold in India | 10 per cent or more of a listed company's equity | Below 10 per cent |
Answer: (d) 1, 2 and 3 only.
Why each option is right or wrong
- (a) Incorrect. Portfolio investment is not Foreign Direct Investment.
- (b) Incorrect. Portfolio investment is not FDI, and subsidiaries are left out.
- (c) Incorrect. A majority foreign equity holding is also FDI.
- (d) CORRECT. Subsidiaries, majority holdings and wholly foreign-financed companies are FDI.
Key point
FDI: lasting interest and control (subsidiaries, majority stakes, 10 per cent or more of listed equity). Portfolio investment: shares and bonds below 10 per cent, no control, volatile.
Remember
FDI = control. Portfolio = no control.
Common mistakes
- Treating all foreign money as FDI.
- Forgetting the 10 per cent line between FDI and portfolio investment.
- Thinking FDI must be 100 per cent ownership; a controlling stake is enough.
Exam tip
FDI means control; portfolio means returns. 'Portfolio investment' in a list of FDI items is always the odd one out.
Sources
- DPIIT — Consolidated FDI Policy Circular (definitions)
- Reserve Bank of India — Foreign Exchange Management (Non-debt Instruments) Rules: FDI and FPI