Previous Year Question

The mere inflow of money from abroad is not sufficient to classify it as Foreign Direct Investment. The nature of investment—equity participation, ownership interest and a lasting economic interest—is important.

Under the current FEMA framework, investment by a person resident outside India:

• in the equity instruments of an unlisted Indian company is FDI;

• amounting to 10% or more of the fully diluted equity capital of a listed Indian company is FDI; and

• below 10% is generally treated as Foreign Portfolio Investment.

1. Foreign Currency Convertible Bonds — Can be included

A Foreign Currency Convertible Bond (FCCB) is a bond issued by an Indian company in a foreign currency. It gives the investor an option to convert the bond into equity shares of the issuing company under specified conditions.

At the time of issuance, an FCCB is a debt instrument. After its conversion into equity shares, however, the resulting foreign equity investment can be included in FDI, subject to the applicable FDI policy, sectoral cap and entry route. The expression “can be included” in the question is therefore significant.

2. Foreign institutional investment with certain conditions — Can be included

The older regulatory framework used the expression Foreign Institutional Investor, while the current framework generally uses Foreign Portfolio Investor.

An individual FPI investment below 10% of the fully diluted paid-up equity capital of a listed Indian company is treated as portfolio investment. If the investment reaches or crosses 10% under the prescribed procedure, it can be reclassified as FDI. Therefore, foreign institutional investment may be included in FDI under certain conditions.

3. Global Depository Receipts — Can be included

A Global Depository Receipt (GDR) is a negotiable financial instrument issued by a foreign depository and represents the underlying equity shares of an Indian company.

Foreign investment raised through Depository Receipts can be included in FDI when it is backed by underlying equity shares and complies with the applicable sectoral caps and other conditions of India’s FDI policy.

4. Non-Resident External deposits — Not included

A Non-Resident External deposit is a bank deposit maintained in India by an NRI. It constitutes a deposit liability of the concerned bank; it does not provide the depositor with equity ownership or management control in an Indian company.

Under Balance of Payments and foreign-investment classification, bank deposits are generally classified as other investment/deposit liabilities, not FDI. Therefore, an NRE deposit does not become direct investment merely because the funds originate abroad.