UPSC Prelims Practice Questions — Net FDI at $3.3 bn in August, stayed positive for third consecutive month: RBI bulletin

Q1. With reference to how foreign investment in listed Indian companies is classified under India's foreign investment framework, consider the following statements: Which of the statements given above is/are correct?

  1. Investment by a registered Foreign Portfolio Investor always remains portfolio investment, whatever the size of its stake in a listed Indian company.
  2. The 10% threshold separating FDI from portfolio investment is measured on a fully diluted basis, that is, counting the shares that would exist if all convertible instruments were converted.
  3. If an individual non-resident's holding in a listed Indian company rises to 10% or more, the entire holding, and not just the portion above 10%, is reclassified as FDI.
  • A. 1 and 3 only
  • B. 1 and 2 only
  • C. 2 and 3 only
  • D. 1, 2 and 3

Q2. A fund resident outside India makes three investments through equity instruments, each measured against post-issue paid-up equity on a fully diluted basis: (A) 6% of a listed Indian company, (B) 4% of an unlisted Indian company, and (C) 12% of a listed Indian company. Under India's foreign investment rules, which of these investments would be classified as Foreign Direct Investment?

  • A. Only the investment in C
  • B. Only the investments in B and C
  • C. Only the investments in A and C
  • D. The investments in A, B and C

Q3. Assume that gross FDI inflows into India in a month stay unchanged. Consider the following developments in that month: Which of the developments given above would lower India's net FDI for the month?

  1. A foreign parent company sells part of its stake in its Indian subsidiary through an offer-for-sale in an IPO and remits the proceeds abroad.
  2. A foreign portfolio investor holding 3% of a listed Indian company sells its shares and takes the proceeds out of India.
  3. An Indian company acquires a manufacturing firm abroad by taking a controlling stake in it.
  • A. 1 and 2 only
  • B. 2 and 3 only
  • C. 1, 2 and 3
  • D. 1 and 3 only

Q4. Consider the following data on India's FDI for a month: gross FDI inflows were about 24% lower than in the previous month but about 68% higher than a year earlier; total FDI outflows rose from $7.2 billion in the previous month to $7.7 billion; outward FDI by Indian firms declined compared with the previous month; net FDI remained positive. Which of the following inferences can validly be drawn from the above data?

  1. Repatriation or disinvestment by foreign investors was higher than in the previous month.
  2. Net FDI for the month was lower than in the previous month.
  3. The month-on-month fall in gross inflows was caused mainly by Indian firms investing abroad.
  4. Foreign investors' interest in India had weakened compared with a year earlier.
  • A. 1 and 2 only
  • B. 2 and 3 only
  • C. 3 and 4 only
  • D. 1, 2 and 4 only

Q5. Consider the following statements: Which of the following is correct in respect of the above statements?

  1. A country can record strong year-on-year growth in gross FDI inflows while its net FDI remains modest.
  2. Net FDI is computed by subtracting from gross inflows both repatriation or disinvestment by foreign investors and direct investment made abroad by domestic firms.
  • A. Both Statement-I and Statement-II are correct and Statement-II explains Statement-I
  • B. Both Statement-I and Statement-II are correct, but Statement-II does not explain Statement-I
  • C. Statement-I is correct, but Statement-II is incorrect
  • D. Statement-I is incorrect, but Statement-II is correct

Q6. Consider the following statements: Which of the following is correct in respect of the above statements?

  1. Financing a current account deficit through net FDI is generally regarded as more sustainable than financing it through External Commercial Borrowings.
  2. FDI inflows, being equity rather than debt, are recorded outside the balance of payments and therefore do not add to the country's external liabilities.
  • A. Both Statement-I and Statement-II are correct and Statement-II explains Statement-I
  • B. Both Statement-I and Statement-II are correct, but Statement-II does not explain Statement-I
  • C. Statement-I is correct, but Statement-II is incorrect
  • D. Statement-I is incorrect, but Statement-II is correct

Q7. With reference to the role of foreign direct investment in financing India's current account deficit, consider the following statements: Which of the statements given above is/are correct?

  1. Both FDI and External Commercial Borrowings are recorded in the capital (financial) account of India's balance of payments.
  2. Unlike an External Commercial Borrowing, FDI does not create a contractual obligation to repay principal on a fixed schedule.
  3. Net FDI can be positive in a year in which net capital inflows still fall short of financing the current account deficit.
  • A. 1, 2 and 3
  • B. 1 and 3 only
  • C. 1 and 2 only
  • D. 2 and 3 only

Q8. With reference to the routes for foreign direct investment into India, consider the following statements: Which of the statements given above is/are correct?

  1. Under the automatic route, a non-resident investor needs no prior approval from either the Reserve Bank of India or the Central Government.
  2. Under the government route, the investment may be made first and the Government's approval obtained afterwards within a stipulated period.
  • A. 1 only
  • B. 2 only
  • C. Both 1 and 2
  • D. Neither 1 nor 2