Question

With reference to Foreign Direct Investment in India, which one of the following is considered its major characteristic?
1. It is the investment through capital instruments essentially in a listed company.
2. It is a largely non-debt creating capital flow.
3. It is the investment which involves debt-servicing.
4. It is the investment made by foreign institutional investors in the Government securities.

Answer 1

Correct Answer - Option 2 : It is a largely non-debt creating capital flow.

The correct answer is option 2.

• Debt service is the cash that is required to cover the repayment of interest and principal on a debt for a particular period. FDIs have no link with this concept, Hence option 3 is incorrect.
• The investment is done through capital instruments in (1) an unlisted Indian company; or (2) 10% or more of the post issue paid-up equity capital on a fully diluted basis of a listed Indian company. Hence, option 1 is incorrect.
• FDI investment can be made in equities or equity-linked instruments or debt instruments issued by the company and they are not directly related to government securities. Hence option 4 is incorrect.
• Foreign Institutional Investment does the investment made by foreign institutional investors in Government Securities.
• FII refers to the group of investors who helps to bring the FPI into a country. In other words, Foreign Institutional Investors is the way through Foreign Portfolio Investment is done.
• Foreign Direct Investment (FDI) is the investment by a non-resident entity/person resident outside India in the capital of an Indian company under Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2017.  
• FDI’s are long term investment. It is also nondebt creating capital flow as it has no direct repayment obligation for the residents.

Debt Flow and Non Debt Flow

• Debt Flow-
  • A debt flow is a type of foreign capital where there is an obligation for the residents to repay it.
• Non Debt Flow-
  • A non-debt flow is the one where there is no direct repayment obligation for the residents. 
  • For example-FDI, FPI, and Depository Receipts are non-debt flows.ECBs, FCCBs, Rupee Denominated Bonds, NRI deposits, and banking capital are debt creating flows. Hence option 2 is correct.