FOREIGN INVESTMENT:

Basic & Advance

HANDOUT NO-14
MULTIPLE CHOICE QUESTIONS (MCQs)
Question-1: Which of the following are capital instruments permitted for receiving foreign
investment in an Indian company?
1. Equity shares
2. Preference Shares
3. Debentures
Choose the correct option:
a. Only1
b. Both1&2
c. Both2&3
d. 1,2&3

Question-2: Which of the following are the features of FDI?

1. They are considered to be long term & steady investments.
2. They are likely to introduce superior technology in the host country.
3. They most likely bring with them the superior global management practices
4. They exploit hitherto untapped business opportunities thereby generating employment
opportunities.
Choose the correct option:
a. Both1&2
b. 1,2&3
c. 1,3&4
d. 1,2,3&4

Question-3: Which of the following is an example of “Hot Money”?

1. Foreign Direct Investment (FDI)
2. Foreign Institutional Investment (FII)
3. Foreign Portfolio Investment (FPI)
Choose the correct option:
a. Only2
b. Both1&2
c. Both2&3
d. 1,2&3

Question-4: Analyse the following statements regarding foreign investment in India:

1. FIIs hold upto 10% stake in Indian companies.
2. FDI holds greater than equal to 10% stake in any Indian company.
Select the correct answer using the code given below:
a. 1 only
b. 2 only
c. Both 1 and 2
d. Neither 1 nor 2

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Question-5: As per the Government’s FDI policy, which of the following is/are correct:
1. FDI holds greater than 10% stake in listed firms.
2. All foreign investments in unlisted firms are considered as FDI.
Select the correct answer using the code given below:
a. 1 only
b. 2 only
c. Both 1 and 2
d. Neither 1 nor 2

Question-6: NRIs invest in India through various accounts like NRE, NRO, FCNR (B) etc.
Which of the following is/are true in this context:
1. NRE is dollar denominated account.
2. NRO is dollar denominated account.
3. FCNR is rupee denominated account.

Choose the correct option:

a. Only1
b. Both1&2
c. 1,2&3
d. None of these

Question-7 [2019]: Which of the following is issued by registered foreign portfolio investors
to overseas investors who want to be part of the Indian stock market without registering
themselves directly?
a. Certificate of Deposit
b. Commercial Paper
c. Promissory Note
d. Participatory Note

Question-8 [2020]: With reference to Foreign Direct Investment in India, which one of the
following is considered its major characteristic?
a. It is the investment through capital instruments essentially in a listed company.
b. It is a largely non-debt creating capital flow.
c. It is the investment which involves debt-servicing.
d. It is the investment made by foreign institutional investors in the Government securities.

Question-9 [2021]: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?

a. 1, 2 and 3
b. 3 only
c. 2 and 4
d. 1 and 4

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 FOREIGN INVESTMENT
MEANING OF FOREIGN INVESTMENT
§ Foreign investment is when a company or BASIC FORMS OF FOREIGN INVESTMENT
individual from one nation invests in 1. Foreign Institutional Investment (FII)
assets or ownership stakes of a company 2. Foreign Direct Investment (FDI)
based in another nation. 3. Sub-Accounts
§ The government of India has brought out 4. Qualified Foreign Investment (QFI)
various modes of foreign investment 5. Foreign Portfolio Investment (FPI)
through which an individual or a company 6. NRI Investment
can invest in.
FOREIGN INSTITUTIONAL INVESTMENT (FII)
§ FII means an institution incorporated outside India which proposes to make investment
in India. They are registered as FIIs in accordance with SEBI Regulations.
§ FIIs are interested in capital gain and momentary price differences.
§ FIIs do not generally influence the management of the enterprise.
§ FIIs may include mutual funds, hedge funds, insurance firms, pension funds, financial
institutions, etc.
SUB-ACCOUNTS
§ Sub-Account means a person resident outside India, on whose behalf an FII proposes to
invest in India. Parties who wish to
Multilateral Memorandum of
make international investments have
Understanding Concerning Consultation and
to open a sub-account with a FII already
Cooperation and the Exchange of Information
registered with SEBI. Sub-Account & FII
(MMoU-2002) was developed by the
are governed by the SEBI Regulations.
International Organization of Securities
QUALIFIED FOREIGN INVESTMENT (QFI)
Commissions (IOSOC). It’s aim is to enhance
§ QFI means a person who is (i) resident
the level of co-operation and information
of a country that is a member of
exchange to combat cross-border fraud and
Financial Action Task Force (FATF) or a
other securities violations.
member of a group which is a member
of FATF; and (ii) resident of a country that is a signatory to MMOU.
§ QFI is a qualified foreign investor that maybe an individual, firm or fund that is located
outside India. These firms can directly make investments in the India without the
requirement of opening a sub-account with other FIIs.
§ QFIs are governed by the guidelines issued by SEBI and RBI.
FOREIGN PORTFOLIO INVESTMENT (FPI)
§ On the basis of Chandrasekhar FII or FPI enter a country and invest in stocks.
Committee Report, SEBI in 2014 They do not have direct control over securities
merged the existing classes of or business. Their intention is to take advantage
investors namely FII, their sub of interest rate differential between foreign and
accounts, and Qualified Foreign domestic economy. They are also called “Fly-by-
investors (QFI) into a new class – night” money or “hot money”. The intention is
Foreign Portfolio Investor (FPI). not to take controlling interest, but to diversify
§ FPI means an investment by any portfolio ensuring hedging and to gain high
single investor or investor group, returns with quick entry and exit.
which shall not exceed 10% of the
equity of an Indian company. Any investment beyond the threshold of 10% shall be
considered as Foreign Direct Investment (FDI).

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TWO CATEGORIES FOR FPI
1. Category I FPI which mainly include: Government and Government related investors as
central banks, sovereign wealth funds, international or multilateral organizations.
a. Pension funds and university funds
b. Appropriately regulated entities such as asset management companies, banks,
investment managers, investment advisors, portfolio managers
c. Eligible entities from the Financial Action Task Force (FATF) member countries
2. Category II FPI which include: All investors not eligible under Category I such as:
a. appropriately regulated funds not eligible as Category-I foreign portfolio investor
b. endowments and foundations
c. charitable organizations
d. corporate bodies
e. family offices
f. Individuals
g. Unregulated funds in the form of limited partnership and trusts
FOREIGN DIRECT INVESTMENT (FDI)
§ FDI is an investment made by a company or individual who is an entity in one country, in
the form of controlling ownership in business interests in another country.
§ FDI could be in the form of establishing business operations or by entering into joint
ventures by mergers and acquisitions, building new facilities etc.
§ With FDI, foreign companies are directly involved with day-to-day operations in the other
country. This means that they aren’t just bringing money with them, but also knowledge,
skills and technology.
§ Generally FDI involves a lasting interest in the management of an enterprise and includes
reinvestment of profits.
ROUTES FOR FDI
1. Automatic Route: It means the entry route through which investment by a person
resident outside India does not require the prior approval of the Reserve Bank of India or
the Central Government. Examples of sectors under the automatic route include, among
others, infrastructure, healthcare, manufacturing and renewable energy.
2. Government/Approval Route: Under this route, prior approval of the Government of
India is required. Proposals for foreign investment under Government Route, are
considered by respective Administrative Ministry/Department. Sectors under the
approval route include, among others, multi-brand retail, broadcasting, banking, defense,
mining, print media and biotechnology.
NEW REFORM (2020):
§ On April 18, 2020, via new regulation, the GOI added all FDI by non-resident entities
located in (or having "beneficial owners" in) countries that share a land border with
India to the approval route, regardless of the quantum of investment or sector.
§ Countries that share a border with India include Pakistan, Bangladesh, China, Nepal,
Myanmar and Bhutan.

SECTORS PROHIBITED FOR FOREIGN INVESTMENT IN INDIA

Prohibited areas for Foreign Investment in India are:
1. Lottery Business
2. Gambling and Betting including casinos
3. Chit Funds
4. Nidhi Company

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5. Trading in Transferable Development Rights (TDR)
Trading in Transferable Development Rights (TDR):
§ Suppose Government acquires land of an individual for construction of roads, civic
amenities etc. The government issues TDR Certificate giving him/her the rights to a
certain amount of additional built-up area in place of area surrendered by the owner of
the land so that the extra built-up area can be used by him in an optimum manner.
§ Just as financial assets like shares, TDRs are also traded for cash. Most of the developers
purchase the same and utilize them for increasing their permissible development rights.

6. Real Estate Business or Construction of farm houses

7. Manufacturing of cigars, cheroots, cigarillos and cigarettes, of tobacco or of tobacco
substitutes
8. Sectors not open to private sector investment- atomic energy, railway operations (other
than permitted activities mentioned under the Consolidated FDI policy)
NIDHI:
§ Nidhi Company is a certain category of NBFC.
§ Its aim is to encourage savings amongst its members. Nidhi companies are allowed to
take a deposit from and lend to the members only. In other words, the funds contributed
to a Nidhi company come only from its members and are to be used only by the
members of the Nidhi.
CHIT-FUND:
§ In a chit fund scheme, a group of people contribute periodically towards the chit value
for a duration equal to the number of investors (members or subscribers).
§ The amount collected is given to the person, who is either selected through a lucky draw
(lottery system) or an auction.
OTHER CONDITIONS ON INVESTMENT BESIDES ENTRY CONDITIONS
Besides the entry conditions on foreign investment, the investment/investors are required to
comply with all relevant sectoral laws, regulations, rules, security conditions, and state/local
laws/regulations.
ARVIND MAYARAM COMMITTEE (2014):
§ Foreign investment of ≥ 10% in a listed company will be treated as FDI
§ All FI in unlisted companies would be treated as FDI
§ FI of < 10% will be treated as FII

FACTS RELATED TO FOREIGN INVESTMENT IN INDIA

(For general/additional reading)
§ Filing of Application Proposal for foreign investment, along with supporting documents to
be filed online, on the Foreign Investment Facilitation Portal.
§ DPIIT will identify the concerned Ministry/ Department and thereafter, circulate the
proposal. DPIIT sends the proposals to RBI also.
§ Proposed investments from Pakistan and Bangladesh would also require clearance from
the Ministry of Home Affairs.
§ Proposals involving FDI exceeding INR 50 bn (approx. Rs 5000 cr) shall be placed before
the Cabinet Committee of Economic Affairs

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§ Proposed investments in certain sectors such as defense, broadcasting and
telecommunication also go through an additional layer of security clearance from the
Ministry of Home Affairs.
§ And, all investments from countries that share a land border with India are subject to
review by the DPIIT and the Competent Authority.
§ The DPIIT has been tasked with the responsibility of facilitating FDI.
PAERTICIPATORY NOTES(PN)/OFFSHORE DERIVATIVE INSTRUMENT (ODI):
§ ODIs/p-notes are instruments used by the foreign investors to invest in India’s securities
markets without getting registered with the SEBI.
§ Through participatory notes, a foreign investor can invest in India’s stock markets and
bond markets without these regulatory hassles.
§ Participatory notes are issued by India-based brokers or FIIs registered with SEBI, to
overseas/ foreign investors. These brokers/ FIIs make investments on behalf of overseas
investors.
Concerns with PNs:
§ It was suspected that p-notes were used for round-tripping of domestic black money.
§ There were fears that some terror outfits across globe are also routing their funds through
PNs to Indian capital market.
§ In June 2007, 56 % of the total Foreign Institutional Investment in India was through p-
notes.
§ So, gradually SEBI has been tightening norms on PNs and now they are also subjected to
some scrutiny like basic KYC.
HOW CAN NRIs INVESTMENT IN INDIA?
NRI can invest directly in IPO (i.e. primary market instruments) as well as buy and sell stocks
in the secondary market (i.e. stock exchange). Along with these, NRIs can also invest in other
capital market instruments like Mutual Funds, Derivative trading (Futures and Options),
Bonds, and Exchange Traded Funds.
1. To invest in IPO, NRIs need to open demat and trading account with SEBI registered broker
in India.
2. NRIs can invest in the secondary capital markets in India through the portfolio investment
scheme (PIS). Under this scheme, NRIs can acquire shares of Indian companies through
the stock exchanges in India. PIS account is basically required by the SEBI to monitor the
investment limit by NRIs in stock market. PIS bank account is not required for making
investments in mutual funds and applying in IPOs.
3. To invest in Mutual funds, NRIs need to open demat and trading account with SEBI
registered broker in India.
Non-Resident Ordinary (NRO) Bank FACTS FOR PRELIMS:
Account & Non-Resident External (NRE) § An NRI or an OCI may subscribe to National
Bank Account Pension System governed and
§ NRIs must have a saving bank account administered by Pension Fund Regulatory
before they start to invest. There are and Development Authority (PFRDA).
two types of bank accounts NRIs can § An NRI is not allowed to invest in a firm
operate depending upon their income: engaged in any agricultural/plantation
1. Non-Resident Ordinary (NRO) activity or real estate business or print
Bank Account (Income from India) media.
2. Non-Resident External (NRE) Bank Account (Income out of India)

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 § Both the accounts are savings accounts maintained in Indian Rupees. An NRI can remit
his/her foreign income earned outside India in NRE bank account, which is fully
repatriable. Income in India is parked in NRO bank account, which is partially repatriable.
§ In case of an NRO account, the interest amount can be repatriated; however, in case of
the principle amount, one can remit only up to USD 1 million in a financial year.

FOREIGN CURRENCY NON RESIDENT (BANK) ACCOUNT [FCNR (B)]:

§ FCNR Accounts are Term Deposit Accounts and not a Savings Account. FCNR account can
only be opened as a fixed deposit and only in “permitted foreign currencies" freely
convertible in Indian rupees. These include various foreign currencies like Pound Sterling,
US Dollar, Canadian Dollar, Australian Dollar, EURO and Japanese Yen etc.
§ These accounts can be opened for a period between one year and five years. In case of
premature withdrawals, NRIs have to pay penalty in terms of reduction in the interest
rate. However, in case the deposits under FCNR are liquidated before completion of one
year, no interest is payable.
§ Since these accounts are opened in foreign currency, there is no risk due to changes in the
exchange rate of the currency of the deposit and Indian currency.
§ The interest credited in FCNR account and the principal amount in FCNR account is fully
repatriable (i.e. can be freely remitted outside India without any permission from RBI).
The interest can also be credited to NRE or NRO account.
§ The interest on FCNR account is exempt from tax in India but may be taxable in country
of NRI’s residence.

FOREIGN INVESTMENT REFORMS

[NOTE: All these reforms are related to current developments/affairs. These must be
updated before exam.]
[Link] WORKING GROUP ON FPI (2018-19)
§ Constituted by SEBI
§ Duration: March 26, 2018 to May 2019
§ Chairman: Mr. H.R. Khan, RBI Deputy Governor (Retired)
OBJECTIVE:
1. To advise SEBI to simplify SEBI FPI Regulations, 2014.
2. To advise SEBI on incorporating the provisions contained in the circulars, FAQs and
operational guidelines issued by SEBI concerning FPIs.
3. To advise on any other issue relevant to FPIs.
MAIN POINTS IN KHAN REPORT
1. FPIs were re-categorised into 2 categories:
a. Category I: Investors related to government (like Central Banks) & regulated entities
(like Banks, MFs).
b. Category II: Appropriately regulated funds not eligible as Category I (example:
charitable societies, corporate bodies, Trusts etc.)
2. Merger of FPI & NRIs routes to bring in a single regime for foreign investors and regulate
NRI and PIO fund inflows.
3. Easing the regulatory framework of FPI, SEBI simplified KYC requirements for them and
permitted them to carry out off-market transfer of securities.

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VOLUNTARY RETENTION ROUTE (VRR)-2019
§ Reserve Bank of India (RBI) introduced a scheme for Voluntary Retention Route (VRR) for
investments by Foreign Portfolio Investors (FPIs) in debt markets in India on 1 March 2019.
§ This scheme enables FPIs to invest in debt markets free of the general regulatory norms
applicable to FPI investments, provided FPIs voluntarily commit to retain a required
minimum percentage of their investments in India for a specified period of time.
Participation through this route is entirely voluntary.
Features of VRR:
1. It was a new channel of investment for FPIs.
2. Any FPI registered with SEBI can participate in the VRR.
3. FPIs under the VRR must voluntarily commit to retain a required minimum percentage of
their investments in India for a defined period of time.
4. RBI has put a higher investment cap under the VRR to Rs 2,50,000 crore with a view to
attract long-term and stable FPI investments into debt markets.
FULLY ACCESSIBLE ROUTE (FAR)-2020:
§ RBI has introduced a separate channel, namely ‘Fully Accessible Route’ (FAR), to enable
NRIS to invest in specified government bonds with effect from April 1, 2020.
§ RBI also enabled a Fully Accessible Route (FAR) for investment by NRIs in government
securities.
§ Under FAR there won’t be any limits on investment in G-Secs by NRIs.
§ These securities will continue to be eligible for investment by residents too.
§ All new issuances of government securities of 5-year, 10-year and 30-year tenors from the
financial year 2020-21, are eligible for investment under the FAR.
AMENDED FDI POLICY (APRIL 2020)
§ DPIIT released an amendment of the FDI Policy. An entity of a country which shares land
border with India or where the beneficial owner of an investment into India is situated in
or is a citizen of any such country can invest only under the government route.
Bordering States:
1. Afghanistan
2. Bangladesh
3. Bhutan
4. China
5. Myanmar
6. Nepal
7. Pakistan

CURRENT AFFAIRS
Note: This section is for general reading. Since it is current in nature, one must update it two-
three weeks prior to UPSC Examination.
SECTOR SPECIFIC CONDITION FOR FDI
Recall, that there can be three routes of FDI:
1. 100% Automatic Route
2. 100% Government Route
3. Hybrid Route (upto a limit AR + thereafter GR)

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FDI LIMITS IN IMPORTANT SECTORS

[Link] SECTOR FDI LIMIT ENTRY ROUTE

1 Banking- Public 20% Government

2 Banking- Private 74% 49%- Automatic.

Above 49-74% Government

3 Insurance (for LIC only 20% is permitted 74% Automatic

under automatic route)

4 Asset Reconstruction Companies 100% Automatic

5 Credit Information Companies 100% Automatic

6 White Label ATMs 100% Automatic

7 Pension sector 74% Automatic

8 Agriculture & Animal Husbandry 100% Automatic

9 Plantation sector 100% Automatic

10 Mining 100% Automatic

11 Petroleum & Natural gas refining 100% Automatic

12 Defence manufacturing 100% Automatic up to 74%.

Above 74% under Government
route.

13 Broadcasting teleports 100% Automatic

14 Broadcasting content services 49% Government

15 Digital media, dealing with news 26% Government

16 Publishing/printing of scientific and 100% Government

technical magazines/speciality journals

17 Civil aviation- Airports 100% Automatic

18 Civil aviation- Air transport services 100% Automatic up to 49% Above 49%
under Government route.

19 Telecom 100% Automatic.

20 Roads and Railways 100% Automatic

21 Financial services’ activities regulated by 100% Automatic

RBI, SEBI, IRDAI, and other regulator

22 Pharmaceuticals (Greenfield) 100% Automatic

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23 Pharmaceuticals (Brownfield) 100% Automatic up to 74%
Above 74% under Government

24 Power exchanges 49% Automatic

25 Construction development 100% Automatic

26 Industrial parks 100% Automatic

27 Satellites manufacturing 100% Automatic Upto 74%

Above 74% under Government

28 E-commerce activities 100% Automatic

29 Private security agencies 74% Automatic up to 49%.

Above 49%- 74% under Government

30 Single-brand retail trading 100% Automatic

31 Multi-brand retail trading 51% Government

32 Duty-free shops 100% Automatic

33 Food products manufactured or 100% Government

produced in India

34 Cash & carry wholesale trading 100% Automatic

35 Biotechnology (Greenfield) 100% Automatic

36 Biotechnology(Brownfield) 74% Automatic up to 74%.

Above 74% under government

37 Electrical machinery and system 100% Automatic

38 Food processing 100% Automatic

39 Ports and shipping 100% Automatic

40 Textiles and garments 100% Automatic

41 Tourism and hospitality 100% Automatic

42 Automobiles and Auto Components 100% Automatic

43 Healthcare centres and Hospitals 100% Automatic

44 Manufacturing (Non critical sectors) 100% Automatic

45 Leather 100% Automatic

46 Gems and Jewellery 100% Automatic

47 Electronic Systems 100% Automatic

48 Coal and Lignite 100% Automatic

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 49 Toy industry 100% Automatic

50 Space sector 100% Satellites, their components:

Automatic up to 74%.
Above 74% under government
Launch Vehicle & associated system:
Automatic up to 49%.
Above 49% under government.

Automatic Route
Under the Automatic Route, the foreign investors do not require any prior approval from the
Government of India for the investment.
Government Route
Under the Government Route, prior to investment, approval from the Government of India is required.
Proposals for foreign direct investment under Government routes are considered by the respective
Administrative Ministry/ Departments.

FDI IN RETAIL SECTOR

SINGLE BRAND RETAIL TRADE (SBRT):
§ The FDI cap on the single-brand retail trading is set at 100% through the automatic route.
The automatic route means where the foreign investor or the Indian company does not
require any prior permission or approval from RBI or the Government of India.
§ Under FDI Policy of SBRT model, international retailers that enters India can sell through
their stand-alone stores in shopping locations/streets. Examples of Companies: H&M (CP
Street, New Delhi), IKEA (Hyderabad, Telangana)
§ 100% FDI through automatic route is also allowed in Single Brand Retail Trade through
online platforms provided company establishes physical stores within 2 years from date
of start of online retail.
§ FDI in Single Brand product retail trading would be subject to the following
conditions:
a. Products to be sold should be of a ‘Single Brand’ only.
b. ‘Single Brand’ product-retail trading would cover only products which are branded
during manufacturing.
c. In respect of proposals involving foreign investment beyond 51%, sourcing of 30%
of the value of goods purchased, will be done from India, preferably from MSMEs,
village and cottage industries, artisans and craftsmen, in all sectors.

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MULTI BRAND RETAIL TRADE (MBRT):
Foreign direct investment (FDI) is allowed under Multi-Brand Retail Trading upto 51% through
the government approval route. FDI in multi brand retail trading, in all products, will be
permitted, subject to the following conditions:
a. Minimum amount to be brought in, as FDI, by the foreign investor, would be US $ 100
million.
b. At least 50% of total FDI brought in the first tranche of US $ 100 million, shall be invested
in 'back-end infrastructure' within three years. ‘Back-end infrastructure’ will include
capital expenditure on activities like investment made towards processing,
manufacturing, distribution, design improvement, quality control, packaging, logistics,
storage, ware-house etc. Expenditure on land cost and rentals, if any, will not be counted
for purposes of backend infrastructure.
c. At least 30% of the value of procurement of manufactured/processed products
purchased shall be sourced from Indian MSMEs, which have a total investment in plant &
machinery not exceeding US $ 2.00 million.
d. Government will have the first right to procurement of agricultural products.
e. FDI is not allowed in e-commerce of Multi-brand Retail trading.

FLOWCHARTS/TABLES
NRE vs NRO vs FCNR (B):
[Link] Parameters NRE NRO FCNR
1 Account
Maintained in
2 Withdrawals
3 Repatriability
4 Account Type
5 Taxation

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