fdi in india and its growth linkages - Department Of Industrial Policy ...

sector, non-profit institutions serving households sector, and the household sector. Enterprises can fall under any of these
five sectors, and could be direct investors since any resident unit may own or control a non-resident unit that qualifies
as a direct investment enterprise. However, enterprises covered under the non-financial corporation sector or the
financial corporation sector can only be foreign direct investment enterprises, because households and governments
cannot be owned or controlled by non-resident units. Further, non-profit institutions serving household sector may be
established or owned by non-residents, but financial transactions are not driven by investment considerations and thus
they are not generally regarded as direct investment enterprises.
8.5 Foreign Direct Investor-Foreign Direct Investment Enterprise Relationship
As discussed elsewhere, to include financial transactions or position as foreign direct investment, the two institutional
units should be resident in different economies and they should be in a direct investment relationship. A foreign direct
investor is an institutional unit resident in one economy that has acquired either directly or indirectly at least 10 per cent
of the voting power of an enterprise or equivalent in an unincorporated enterprise that is resident in another economy.
A direct investor can be an individual; a group of related individuals; an incorporated or unincorporated enterprise; a
public or private enterprise; a group of related enterprises or a group of unrelated enterprises; a government body; an
estate, trust or other societal organisation; or any combination of the above. In the case of two enterprises each owning
10 per cent or more of each other’s voting power, each enterprise is an investor in the other.
A foreign direct investment enterprise is an enterprise resident, whether incorporated or the equivalent for an
unincorporated, in one economy and in which an investor resident in another economy owns either directly or indirectly
at least 10 per cent of voting power. The threshold ownership of 10 per cent voting power proves the existence of a direct
investment relationship between the direct investor and the direct investment enterprise. It is important to identify the
direct investment relationship in order to find the exact number of FDI-enabled enterprises to be included in the FDI
statistics of a particular economy.
Further, it is important to consider the ownership stake of a direct investor in the ownership chain and the investor’s
relationship with an enterprise other than that of the original enterprise in which 10 per cent voting power is held.
Consider that there are Enterprises A, B and C in different economies. Suppose Enterprise A owns 70 per cent of the
voting power in Enterprise B and is considered as a direct investor in B. Enterprise B, in turn, has 60 per cent of the
voting power in Enterprise C and is considered as a direct investor in C. It is clear that A has control over B and, through
its control over B, it has indirect control over C. Thus, financial transactions between A and C should be relevant to
FDI, even though A has no equity holding in C.
Similarly, a direct investor may have control over more than one direct investment enterprise. For instance, given the
threshold voting power, Enterprise A can have control over B and C. While compiling FDI statistics, it is important to
take into account the financial transactions between B and C, even though there is no equity participation between
them. Enterprise B may raise capital and lend to C at concessional rates because they are both controlled by A. That
is, enterprise A, B and C are in a foreign direct investment relationship and B and C are considered as “fellow
enterprises” of one another. Based on the percentage of equity participation in the foreign direct investment relationship,
a direct investment enterprise can be called a subsidiary or an associate. 4
8.6 FDI Data Reporting
To record the direct investment between residents and non-residents, the Benchmark Definition recommends the use
of two methods to account for the FDI data. They are the asset/liability principle and directional principle. Under the
4. For more details, see OECD (2008), Chapter 3.
FDI DATA REPORTING AND CLASSIFICATION
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