Previous Year Question
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 code given below.
1, 2, 3 and 4
2 and 4 only
1 and 3 only
1, 2 and 3 only
Correct Answer: D
Detailed Solution
Foreign Direct Investment—FDI is a cross-border investment through which a foreign investor establishes a lasting interest, ownership or significant influence in an enterprise.
Statement 1: Indian subsidiaries of foreign companies—Correct
When a foreign company establishes a subsidiary in India, it generally possesses control or significant influence over that subsidiary’s management and policy decisions.
Investment in such a subsidiary is, therefore, treated as FDI.
Statement 2: Majority foreign equity holding—Correct
When a foreign investor owns more than 50% of the equity in an Indian company, it can generally exercise control over the company.
FDI classification does not require 50% ownership in every case; significant influence may arise even at a lower level of ownership. A majority foreign equity holding will, however, clearly constitute FDI.
Statement 3: Companies wholly financed by foreign companies—Correct
If the entire equity capital of an Indian company is provided by a foreign company, the Indian entity will generally be a Wholly Owned Subsidiary—WOS.
The foreign investor possesses complete ownership and control in such a company. It is, therefore, a clear example of FDI.
Statement 4: Portfolio investment—Incorrect
In portfolio investment, an investor seeks financial returns from shares and securities without ordinarily intending to establish control or significant influence over the management of the enterprise.
FDI and Foreign Portfolio Investment—FPI are consequently separate categories.
Basis | FDI | FPI |
Objective | Lasting interest and influence | Financial return |
Management role | Control or significant influence possible | Normally no managerial control |
Nature of investment | Relatively stable | More liquid and market-driven |
Common form | Subsidiary, joint venture or strategic equity | Listed shares, bonds and securities |
Thus, Statements 1, 2 and 3 constitute FDI, whereas portfolio investment is a separate category.
Current Indian legal position (2026)
Under the Foreign Exchange Management (Non-Debt Instruments) Rules:
Investment in the equity instruments of an unlisted Indian company by a person resident outside India is treated as FDI.
Foreign investment of 10% or more of the fully diluted paid-up equity capital of a listed Indian company is treated as FDI.
Foreign investment below 10% in a listed Indian company is generally classified as FPI.
Once an investment is classified as FDI, it continues to be treated as FDI even if it subsequently falls below 10%.
Thus, majority ownership and 100% foreign ownership are clear examples of FDI, but majority ownership is not necessary in every case for an investment to qualify as FDI.