Question

UPSC Prelims 2020 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 (Detailed Solution Below)

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

Detailed Solution

Explanation:

Foreign Direct Investment (FDI) is the investment through equity instruments by a person resident outside India in either of the two:

An unlisted Indian company
10% or more of the post issue paid-up equity capital on a fully diluted basis of a listed Indian company

A debt flow is a type of foreign capital where there is obligation for the residents to repay it. A non-debt flow is the one where there is no direct repayment obligation for the residents. For example, in the case of FDI, there is no debt payment obligation.

Debt servicing is the regular repayment of a debt's interest and principal over a certain period of time. FDI does not require paying off debt.

Therefore, option (2) is the correct answer.

Subject: Economics | Foreign Trade and Investment

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