Chapter 6: External Commercial Borrowings and Foreign Investments in India (CAIIB – Paper 2)

1. Which of the following best defines External Commercial Borrowings (ECBs)?

• A. Borrowings in Indian Rupees from domestic investors
• B. Borrowings from foreign investors but repayable in Indian Rupees
• C. Borrowings raised by eligible resident entities from non-resident lenders in foreign currency or INR
• D. Borrowings through issuance of shares to foreign investors

ECBs are commercial loans, bonds, buyers’ credit, suppliers’ credit, etc. raised by eligible resident entities from recognized non-resident entities in foreign currency or INR.

2. Which of the following is not considered an eligible borrower under ECB guidelines?

• A. Companies in the manufacturing sector
• B. Infrastructure companies
• C. Micro Finance Institutions (MFIs)
• D. Individuals and HUFs

Eligible borrowers include corporates, NBFCs, infrastructure companies, MFIs, etc. However, individuals and HUFs are not permitted to raise ECBs.

3. An Indian infrastructure company raises USD 50 million from an overseas bank for 6 years. Under RBI’s ECB framework, this would fall under:

• A. Automatic Route
• B. Approval Route
• C. FDI inflows
• D. Overseas Direct Investment

Infrastructure companies are permitted to raise ECBs under the Automatic Route, subject to sectoral limits, maturity, and end-use restrictions.

4. Minimum average maturity period for ECBs raised up to USD 50 million by eligible borrowers (other than specified categories) is:

• A. 1 year
• B. 3 years
• C. 5 years
• D. 7 years

As per RBI guidelines, the minimum average maturity period for ECBs up to USD 50 million is 3 years (except for specified borrowers like manufacturing companies with lower limits).

5. Which of the following statements regarding reporting requirements of ECBs is correct?

• A. Borrowers are not required to report ECB transactions
• B. Only annual reporting is required for ECBs
• C. ECB reporting is voluntary and depends on lender
• D. Borrowers must report through Form ECB to RBI via AD Category-I bank on a monthly basis

ECB borrowers must report ECB transactions through the ECB 2 Return on a monthly basis to RBI, routed via the designated Authorized Dealer Category-I bank.

6. Foreign Direct Investment (FDI) differs from ECB mainly because:

• A. FDI represents ownership interest, while ECB represents debt
• B. Both are debt instruments with maturity
• C. FDI has fixed repayment schedule unlike ECB
• D. ECB involves equity inflow, FDI involves debt inflow

FDI represents an ownership stake (equity) in an Indian company, while ECBs are debt raised from overseas lenders with a repayment obligation.

7. A company fails to submit the monthly ECB return to RBI on time. This may attract:

• A. Cancellation of ECB
• B. Conversion of ECB into FDI
• C. Penalty under FEMA for non-compliance
• D. Automatic exemption from reporting

Non-reporting or delayed reporting of ECB transactions attracts penal provisions under FEMA (Foreign Exchange Management Act).

8. Conversion of ECB into equity is permitted under which of the following conditions?

• A. Only with RBI approval in all cases
• B. With mutual consent of lender and borrower, subject to sectoral cap under FDI policy
• C. Only for infrastructure companies
• D. Only if the loan is overdue

ECBs can be converted into equity subject to compliance with the FDI policy, sectoral caps, and pricing guidelines, with the consent of both borrower and lender.

9. Which of the following represents a key difference between Foreign Direct Investment (FDI) and Foreign Portfolio Investment (FPI)?

• A. Both involve controlling ownership in an Indian entity
• B. FPI investors generally hold more than 10% in an Indian company
• C. FDI is always routed through stock exchanges
• D. FDI implies long-term ownership/control, while FPI is more short-term and <10% ownership

FDI involves significant ownership/control (≥10%) and long-term commitment in a business, while FPI represents investment in financial assets without control (less than 10% stake).

10. When an ECB is converted into equity, how is it treated in India’s Balance of Payments (BoP)?

• A. It is treated as Foreign Direct Investment (FDI) inflow
• B. It continues to be shown as external debt
• C. It is treated as portfolio investment inflow
• D. It is considered a capital outflow

Conversion of ECB into equity results in extinguishment of debt and is classified as FDI inflow in the Balance of Payments.

11. Which of the following is a permissible end-use of ECB proceeds?

• A. Purchase of land for real estate business
• B. Investment in capital markets
• C. Import of capital goods
• D. Working capital for speculative activities

ECB proceeds can be used for import of capital goods, modernization of existing units, and infrastructure projects, but not for real estate, capital markets, or speculative activities.

12. A foreign investor buys 12% equity stake in an Indian company directly. This will be classified as:

• A. ECB inflow
• B. FDI inflow
• C. FPI inflow
• D. ADR/GDR issuance

Since the investment exceeds 10% ownership and represents a lasting interest, it is classified as Foreign Direct Investment (FDI).

13. Which form is required to be filed with RBI for reporting conversion of ECB into equity?

• A. Form ECB-2 Return
• B. Form ODI
• C. Form LEC
• D. Form FC-GPR

Conversion of ECB into equity must be reported to RBI through Form FC-GPR (Foreign Currency-Gross Provisional Return) to record the equity inflow.

14. Which of the following foreign investment instruments is NOT considered as FDI?

• A. Foreign Currency Convertible Bonds (FCCBs)
• B. Equity shares issued to a foreign investor
• C. Compulsorily Convertible Debentures (CCDs)
• D. Compulsorily Convertible Preference Shares (CCPS)

FCCBs are treated as ECBs until conversion, not as FDI. Equity shares, CCDs, and CCPS are treated as FDI instruments.

15. Which of the following is NOT an eligible foreign investor under India’s FDI policy?

• A. Non-Resident Indians (NRIs)
• B. Foreign Portfolio Investors (FPIs)
• C. Residents of countries identified as FATF non-compliant jurisdictions
• D. Foreign Institutional Investors (FIIs)

All investors such as NRIs, FPIs, FIIs are eligible foreign investors, except those from jurisdictions that are non-compliant with FATF standards or restricted countries like Pakistan.

16. Under the FDI policy, which of the following is NOT considered as an eligible investee entity?

• A. Indian company
• B. Trusts engaged in non-profit activities
• C. Limited Liability Partnership (LLP)
• D. Start-ups recognized by DPIIT

Eligible investee entities include Indian companies, LLPs, start-ups, and partnership firms. Charitable/non-profit trusts are not eligible for FDI.

17. An NRI wishes to invest in an Indian LLP engaged in consultancy services. Is this permissible under FDI guidelines?

• A. Yes, subject to FDI policy for LLPs and reporting requirements
• B. No, LLPs cannot receive FDI
• C. Yes, but only through ECB route
• D. Yes, but only if routed through an Indian subsidiary

LLPs can receive FDI under the automatic route if 100% FDI is permitted in that sector without performance-linked conditions. The investment must comply with FEMA and reporting requirements.

18. Which of the following foreign investors are specifically allowed to invest in Indian start-ups as per RBI guidelines?

• A. Only NRIs
• B. Only FPIs
• C. Only Multilateral Development Banks
• D. Any non-resident including NRIs, FPIs, foreign VCs, subject to sectoral caps

Start-ups recognized by DPIIT can receive foreign investment from any non-resident, including NRIs, FPIs, and foreign venture capital investors, subject to sectoral caps and conditions.

19. Which of the following investee entities are allowed to issue equity instruments to foreign investors?

• A. Indian companies and LLPs only
• B. Indian companies, LLPs, start-ups, and partnership firms (in specific cases)
• C. Trusts and societies
• D. Sole proprietorship firms

Eligible investee entities for FDI include Indian companies, LLPs, partnership firms, and recognized start-ups. Trusts, societies, and sole proprietorships are generally excluded.

20. Under the automatic route, foreign investors are restricted from investing in which of the following sectors?

• A. IT and BPM services
• B. Infrastructure
• C. Atomic energy, railway operations, and lottery business
• D. Manufacturing sector

Certain sectors such as atomic energy, railway operations (other than permitted activities), lottery, gambling, and chit funds are prohibited for foreign investment. Others fall under automatic or approval route.

21. Which of the following is NOT considered an eligible investment instrument under FDI policy?

• A. Equity shares
• B. Compulsorily Convertible Debentures (CCDs)
• C. Optionally Convertible Debentures (OCDs)
• D. Compulsorily Convertible Preference Shares (CCPS)

Only fully and compulsorily convertible instruments like equity shares, CCDs, and CCPS are eligible under FDI. Optionally convertible instruments are not permitted as they create debt-like obligations.

22. Foreign investment through FDI is prohibited in which of the following sectors?

• A. Renewable energy projects
• B. Lottery business, gambling, and betting
• C. Construction of industrial parks
• D. Infrastructure development

FDI is prohibited in lottery, gambling, betting, chit funds, Nidhi companies, and certain real estate activities. Renewable energy, industrial parks, and infrastructure are open to FDI subject to conditions.

23. Which of the following convertible instruments issued to foreign investors are treated as FDI?

• A. Compulsorily Convertible Debentures (CCDs)
• B. Optionally Convertible Debentures (OCDs)
• C. Redeemable Preference Shares
• D. Debt instruments issued under ECB

CCDs and CCPS are eligible FDI instruments since they are mandatorily convertible into equity. Optionally convertible or redeemable instruments are treated as debt and not eligible as FDI.

24. A foreign investor wants to invest in real estate business in India. As per FDI policy, this is:

• A. Permitted under automatic route
• B. Allowed with RBI approval
• C. Allowed only for NRIs
• D. Prohibited under FDI policy

FDI is prohibited in "real estate business" or trading in land. However, construction development projects (townships, SEZs, housing) are permitted subject to conditions.

25. Which of the following activities are specifically prohibited for FDI inflows in India?

• A. Chit funds, Nidhi companies, and atomic energy
• B. Renewable energy and IT services
• C. Infrastructure and SEZ development
• D. Manufacturing of capital goods

FDI is strictly prohibited in lottery, gambling, chit funds, Nidhi companies, atomic energy, and trading in transferable development rights (TDRs).

26. Under FEMA regulations, pledge of shares of an Indian company by a non-resident investor requires:

• A. No approval, it is freely permitted
• B. Only SEBI’s approval
• C. Compliance with RBI guidelines and reporting requirements
• D. Only approval from the concerned bank

Pledge of shares by non-residents is allowed, subject to compliance with RBI guidelines, FEMA regulations, and reporting requirements to ensure no breach of sectoral caps or security concerns.

27. In case of invocation of pledge of shares held by a foreign investor, the transfer of shares is treated as:

• A. Fresh foreign investment and must comply with sectoral limits
• B. A domestic transfer and needs no approval
• C. Treated as ECB inflow
• D. Only a book entry with no compliance requirement

On invocation of pledge, the acquirer must comply with the FDI policy and sectoral caps as the transfer is considered a new foreign investment.

28. Operational guidelines for foreign investment in India are primarily issued by:

• A. Ministry of Finance
• B. SEBI
• C. IRDAI
• D. RBI in consultation with Government of India

RBI issues operational guidelines for foreign investments under FEMA in consultation with the Government of India. Sector-specific regulators like SEBI or IRDAI may issue additional rules.

29. The Non-Debt Instruments (NDI) Rules, 2019, are notified under which legislation?

• A. Companies Act, 2013
• B. Foreign Exchange Management Act (FEMA), 1999
• C. Banking Regulation Act, 1949
• D. SEBI Act, 1992

The NDI Rules, 2019 were notified under FEMA, 1999 by the Government of India to regulate foreign investments in equity instruments and related non-debt instruments.

30. Which of the following is covered under Non-Debt Instruments (NDI) Rules?

• A. Equity shares, convertible debentures, warrants, and units of investment vehicles
• B. External Commercial Borrowings (ECBs)
• C. Trade credits and banking capital
• D. Overseas borrowings of Indian companies

NDI Rules cover equity instruments such as shares, CCDs, CCPS, warrants, and units of REITs/InvITs. Debt instruments like ECBs and trade credits are governed separately under Debt Instrument Rules.

31. Which of the following documents is mandatory for obtaining foreign investment in India?

• A. Only Board Resolution
• B. Only Auditor’s Certificate
• C. Only KYC report of the foreign investor
• D. Form FC-GPR along with KYC, Board Resolution, and valuation certificate

For obtaining foreign investment, companies must file Form FC-GPR with RBI through AD Bank, supported by KYC of the foreign investor, Board Resolution approving the issue, and valuation certificate as per FEMA.

32. The KYC report for a foreign investor, required while issuing shares, is generally issued by:

• A. Ministry of Corporate Affairs
• B. Authorized Dealer (AD) Bank
• C. Registrar of Companies
• D. Foreign Embassy in India

The AD Bank verifies and issues the KYC report of the foreign investor to ensure the legitimacy of funds and compliance with FEMA guidelines.

33. When foreign investment needs to be refunded due to non-allotment of shares, the company must:

• A. Refund the amount within 60 days of receipt
• B. Refund only after RBI approval
• C. Refund within 180 days without documentation
• D. Adjust the funds against future issues

As per FEMA, if shares are not allotted within 60 days from receipt of investment money, the amount must be refunded to the foreign investor through banking channels.

34. Which of the following documents is required for refund of foreign investment amount to investors?

• A. Only Company’s PAN card
• B. Only Board Resolution
• C. Auditor’s Certificate confirming non-allotment and mode of refund
• D. Filing of Form FC-GPR

For refund of foreign investment, an Auditor’s Certificate is required to confirm that the funds have been refunded properly through normal banking channels in compliance with FEMA.

35. The reporting of refund of foreign investment to RBI is done through:

• A. Form ECB-2
• B. Form FC-GPR
• C. Form ODI
• D. Form FC-TRS or through AD Bank confirmation

Refund of foreign investment is reported to RBI through AD Bank, often supported by Form FC-TRS or equivalent documentation, confirming that the refund has been made as per FEMA rules.

36. Transfer of shares from a resident to a non-resident is permitted subject to:

• A. Only SEBI’s prior approval
• B. FEMA regulations, sectoral caps, and pricing guidelines
• C. Approval from Registrar of Companies
• D. No restrictions

Any transfer of shares between residents and non-residents must comply with FEMA, FDI policy, sectoral limits, and pricing guidelines issued by RBI.

37. When a resident transfers shares to a non-resident, the price of shares cannot be less than:

• A. Fair Valuation as per internationally accepted pricing methodology certified by a Chartered Accountant
• B. Nominal value of shares
• C. Book value of assets only
• D. Any price decided by the Board of Directors

For resident-to-non-resident share transfer, the minimum price should be at least the fair valuation as per accepted pricing methods, certified by a Chartered Accountant, Merchant Banker, or Cost Accountant.

38. For transfer of shares from a non-resident to a resident, the price of shares cannot exceed:

• A. Book value of company
• B. Market value quoted on stock exchange
• C. Fair valuation as per internationally accepted pricing methodology
• D. Nominal value of shares

When shares are transferred from non-resident to resident, the maximum price payable is capped at the fair value determined by internationally accepted valuation methodology.

39. Which form is required to be filed for reporting transfer of shares between resident and non-resident?

• A. Form FC-GPR
• B. Form ODI
• C. Form ECB-2
• D. Form FC-TRS

Form FC-TRS (Foreign Currency – Transfer of Shares) is filed with the RBI through AD Bank for reporting share transfers between residents and non-residents.

40. Which of the following statements about pricing guidelines is correct?

• A. Listed company shares are valued at market price on stock exchange; unlisted shares require valuation certificate
• B. Listed company shares are valued only at book value
• C. Unlisted company shares can be issued at any negotiated price
• D. No valuation rules apply for share transfers

For listed companies, pricing is based on SEBI guidelines (average market price). For unlisted companies, valuation must be done as per accepted international methodology and certified by CA/Merchant Banker.