FDI and FPI in India: Routes, Rules and Key Terms

The correct answer is B. Foreign direct investment is made to acquire a lasting interest in an enterprise abroad, conventionally measured as ten per cent or more of the voting power, and with it comes a say in how the company is run; portfolio investment buys shares and bonds without any such control. Option A is wrong because the investor in FDI is usually a company, and governments are only one kind of investor. Option C is wrong because both FDI and FPI are recorded in the capital or financial account of the balance of payments, not the current account, which records trade and income. Option D is wrong because it describes portfolio investment, the hot money that can leave on a single trading day, while direct investment sits in plant and machinery and cannot be reversed quickly.

The correct answer is B, the Foreign Exchange Management Act, 1999, which came into force in 2000 and governs all dealings in foreign exchange, including inward and outward investment. Option A is wrong because the Foreign Exchange Regulation Act of 1973 was the earlier, far stricter law that FEMA replaced; it treated foreign exchange as a scarce resource and a violation as a criminal offence, while FEMA manages it with civil penalties. Option C is wrong because the Companies Act, 2013 governs the incorporation and running of companies, not the exchange side of an investment. Option D is wrong because the SEBI Act, 1992 created the securities market regulator, which registers portfolio investors but does not govern foreign exchange itself. Remember the shift the name itself records: regulation gave way to management, and the Reserve Bank now administers the Act while the sectoral policy comes from the commerce ministry.

The correct answer is C, the Department for Promotion of Industry and Internal Trade, a department of the Ministry of Commerce and Industry, which was known as the Department of Industrial Policy and Promotion until it was renamed in 2019. Option A is wrong because the Reserve Bank of India administers the exchange side under FEMA and receives the reporting of inflows, but it does not frame the sectoral policy. Option B is wrong because the Securities and Exchange Board of India regulates portfolio investors and the securities market. Option D is wrong because the Ministry of Finance deals with taxation, the budget and financial sector legislation, while the sectoral caps and routes for direct investment come from the commerce ministry's department. The circular is reissued from time to time with the caps and routes for every sector, so an aspirant should read the latest one rather than an old table of percentages.

The correct answer is C, 2017. The Foreign Investment Promotion Board was wound up and its work handed to the administrative ministries concerned, which now receive applications through the Foreign Investment Facilitation Portal. Option A is wrong because 2014 is the year the Securities and Exchange Board of India created the single class of foreign portfolio investors by merging foreign institutional investors, their sub-accounts and qualified foreign investors. Option B is wrong because 2015 is remembered in this chapter for the Make in India campaign gathering pace rather than for the Board. Option D is wrong because 2019 is the year the Department of Industrial Policy and Promotion was renamed the Department for Promotion of Industry and Internal Trade, a change of name that often appears in the same set of questions.

The correct answer is C. Under the automatic route the foreign investor needs no prior permission from either the government or the Reserve Bank of India; the Indian company simply reports the inflow and the issue of shares to the Reserve Bank within the prescribed time. Options A and B are wrong because prior approval is the feature of the other route, the government or approval route, where the application goes to the administrative ministry concerned through the Foreign Investment Facilitation Portal. Option D is wrong because the automatic route carries no single cap: the cap depends on the sector, and in a great many sectors the whole of the equity is open under this route, while a few sectors carry a lower cap or require approval beyond it.

The correct answer is B, the lottery business. The FDI policy lists a small set of prohibited activities: the lottery business, gambling and betting including casinos, chit funds, Nidhi companies, trading in transferable development rights, real estate business and the construction of farm houses, the manufacture of cigars, cheroots and cigarettes, and activities closed to private investment such as atomic energy and railway operations. Options A, C and D are wrong because insurance, telecom services and single brand retail trading are all open to foreign investment, each with a cap and a route set out in the policy circular, and those caps have been raised over the years. The trap in this question is that the permitted sectors are the ones most often in the news.

The correct answer is C, 2014, when the SEBI Foreign Portfolio Investors Regulations came into force and the three older categories, namely foreign institutional investors, their sub-accounts and qualified foreign investors, were merged into one class registered in risk-based tiers. Option A is wrong because 2010 saw no such change. Option B is wrong because 2012 is the year the qualified foreign investor route itself was opened to allow direct investment in Indian equities. Option D is wrong because 2016 is remembered in this chapter for the amendment of the tax treaty with Mauritius, which changed the pattern of inflows, and for the General Anti-Avoidance Rule taking effect soon after. The point to carry away is that the term FII now survives only in older reading.

The correct answer is B. Participatory notes are offshore derivative instruments issued by foreign portfolio investors registered with SEBI to clients abroad who want exposure to Indian shares without registering in India themselves; the underlying shares are held by the issuing investor. Option A is wrong because the Reserve Bank issues no such instrument. Option C is wrong because a share issued by an Indian company to a foreign promoter is simply foreign direct investment, reported to the Reserve Bank. Option D is wrong because sovereign wealth funds invest in India as registered portfolio investors in their own right. These notes are watched closely because the ultimate beneficial owner is not visible to the Indian regulator, which raises the risk of round tripping and money laundering.

The correct answer is B, countries that share a land border with India, namely China, Bangladesh, Pakistan, Nepal, Bhutan, Myanmar and Afghanistan. An entity of such a country, or an investor who is a citizen of or situated in one, may invest only through the government route whatever the sector, and the rule also covers a transfer of ownership that results in such beneficial ownership. Option A is wrong because Commonwealth membership has no bearing on the FDI policy. Option C is wrong because treaty abuse through low-tax jurisdictions is handled by tax law, including the General Anti-Avoidance Rule, and not by this press note. Option D is wrong because membership of the World Trade Organization is not a test under the FDI policy. The note was issued in April 2020, when share prices had fallen sharply, and the reason given was to curb opportunistic takeovers of Indian companies at depressed valuations.

The correct answer is B. Hot money is the name given to short-term portfolio capital that chases returns from one market to another and can be withdrawn within days, pushing up share prices and the rupee while it comes in and pulling both down when it goes. Option A is wrong because direct investment in a factory is the opposite, locked into fixed assets and slow to reverse. Option C is wrong because printing currency to finance a deficit is deficit financing or monetisation, a quite different idea. Option D is wrong because remittances from workers abroad are receipts on the current account of the balance of payments and are among the steadiest inflows India receives, not volatile capital at all. The usual policy answer to such volatility is a cushion of foreign exchange reserves, which lets the central bank sell dollars when portfolio money leaves in a hurry.

The correct answer is B, the capital account, more precisely the capital and financial account, which records transactions that change a country's assets and liabilities abroad; investment flows, loans and banking capital all sit here. Option A is wrong because the current account records trade in goods and services, primary income such as interest and dividends, and transfers such as remittances. Option C is wrong because errors and omissions is only a balancing item that absorbs statistical mismatches. Option D is wrong because a revenue account belongs to government budgeting, not to the balance of payments. A deficit on the current account is financed by a surplus on the capital account, which is why a fall in investment inflows puts pressure on the rupee. The two accounts are linked by identity: the balance of payments must balance, so a current account deficit is met by net inflows on the capital account or by drawing on reserves.

The correct answer is B, greenfield investment, the building of a new unit from the ground up, which adds fresh capacity and employment to the host economy. Option A is wrong because brownfield investment means acquiring, merging with or expanding an existing unit, so the capacity already exists and only ownership changes; a question on the two terms usually turns on that difference. Option C is wrong because portfolio investment buys financial paper and sets up nothing. Option D is wrong because round tripping describes money that leaves the country and comes back disguised as foreign investment to claim the benefit of a tax treaty, which is a route rather than a type of plant. Greenfield investment is what campaigns such as Make in India are designed to attract.