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? (UPSC Prelims 2021)
Answer: 1, 2 and 3
Notes: The correct answer is [A] 1, 2 and 3. In India, the definition of Foreign Direct Investment (FDI) has evolved to include specific composite instruments that involve equity or potential equity stakes by non-residents.

• Foreign Currency Convertible Bonds (FCCBs) (Statement 1 – Correct): FCCBs are debt instruments issued by an Indian company in foreign currency, which can be converted into equity shares at a later date. Since they lead to equity ownership, they are treated as FDI.
• Foreign Institutional Investment (FII) with certain conditions (Statement 2 – Correct): According to the Mayaram Committee recommendations, if a foreign investor (including FIIs/FPIs) holds 10% or more of the post-issue paid-up equity capital of a listed company, it is classified as FDI.
• Global Depository Receipts (GDRs) (Statement 3 – Correct): These are negotiable certificates issued by a depository bank, representing shares in a foreign company. Since GDRs represent underlying equity shares of an Indian company held by a non-resident, they are included in FDI.
• Non-Resident External (NRE) Deposits (Statement 4 – Incorrect): NRE deposits are bank accounts maintained in India by NRIs. These are classified as Debt Liabilities under the Capital Account (specifically under 'Banking Capital') and are not considered FDI as they do not involve an equity stake in an enterprise.

Historically, the distinction between FDI and FPI was blurred until the 10% rule was strictly implemented to categorize "stable" long-term investments (FDI) separately from "hot money" or portfolio investments (FPI).