Q. Which of the following would include Foreign Direct Investment in India?
- Subsidiaries of foreign companies in India
- Majority foreign equity holding in Indian companies
- Companies exclusively financed by foreign companies
- Portfolio investment
Select the correct answer using the codes given below: (UPSC Prelims 2012)
Answer:
1, 2 and 3 only
Notes: The correct answer is
[D] 1, 2 and 3 only. In India,
Foreign Direct Investment (FDI) is defined as an investment made by a person or entity resident outside India in an unlisted Indian company, or in
10% or more of the post-issue paid-up equity capital of a listed Indian company.
- Subsidiaries of foreign companies (Statement 1): When a foreign parent company establishes a 100% owned branch or subsidiary in India, it is a classic form of FDI. The parent company exercises full management and control.
- Majority foreign equity holding (Statement 2): Any investment where a foreign entity holds a majority stake (more than 50%) in an Indian company is classified as FDI because it implies a "lasting interest" and a significant degree of influence over the management of the enterprise.
- Exclusively financed companies (Statement 3): Companies that are 100% financed by foreign capital (where permitted by the FDI policy) are included in FDI. This often occurs in sectors where 100% FDI is allowed under the "Automatic Route."
Why Statement 4 is Incorrect:
- Portfolio Investment (Statement 4): This is classified as Foreign Portfolio Investment (FPI), not FDI. FPI involves the purchase of securities like shares or bonds by foreign investors on the stock exchange. Unlike FDI, FPI is typically short-term, "volatile" (often called "hot money"), and does not involve direct management control or a long-term interest in the company's operations.
Key Differences: FDI vs. FPI| Feature | Foreign Direct Investment (FDI) | Foreign Portfolio Investment (FPI) |
| Duration | Long-term investment. | Short-term/Speculative. |
| Control | Involves management control. | No management control. |
| Asset Type | Physical assets (factories, offices). | Financial assets (stocks, bonds). |
| Entry/Exit | Difficult to enter and exit. | Easy to enter and exit (high liquidity). |