CAIIB BFM MCQs: Intl Equity & Debt (Unit 21) Module C

Correct Answer: B. Foreign Exchange Management Act, 1999 (FEMA). FEMA is the main law that controls how foreign investment happens in India.

Correct Answer: C. Sections 6(3)(b) and 47. These are key sections within FEMA that deal with the transfer or issue of securities to people living outside India.

Correct Answer: C. Foreign Exchange Management (Transfer or Issue of a Security by a Person resident Outside India) Regulations, 2017 (FEMA 20(R)/2017-RB). This regulation specifically outlines the rules for foreign investment through securities.

Correct Answer: C. Foreign Direct Investment. FDI refers to a type of foreign investment where the investor has a significant influence on the management of the company.

Correct Answer: B. Investment made by a non-resident through capital instruments. FDI in an unlisted company specifically involves investment via capital instruments.

Correct Answer: C. 10% or more. Holding 10% or more of the equity in a listed company by a non-resident is a key criterion for FDI.

Correct Answer: B. It will remain classified as Foreign Direct Investment (FDI). Once an investment is classified as FDI, it generally stays that way even if the holding percentage decreases later.

Correct Answer: B. The total number of shares after considering all potential shares from the conversion of instruments like warrants. This basis includes all shares that could potentially be issued.

Correct Answer: C. Below 10%. If the holding is less than 10%, it typically falls under the category of FPI.

Correct Answer: B. The investment is below 10% of the paid-up value of each series of capital instruments. This is an additional condition for FPI classification in listed companies.

Correct Answer: C. Securities and Exchange Board of India (SEBI). FPIs need to register with SEBI to participate in the Indian securities market.

Correct Answer: C. They were deemed Foreign Portfolio Investors (FPIs) for three years after the 2014 regulations. This provided a transition period for the existing FIIs.

Correct Answer: C. Non-resident investment in Indian company capital instruments or Limited Liability Partnership (LLP) capital on a repatriable basis. The key aspects are non-resident investment in specific instruments and the ability to send the funds back.

Correct Answer: C. Lottery business. The syllabus explicitly lists lottery as a prohibited sector for foreign investment.

Correct Answer: C. Trading in Transferable Development Rights (TDRs). This is listed as a prohibited activity for foreign investment.

Correct Answer: C. Nidhi company. Nidhi companies are included in the list of prohibited sectors for foreign investment.

Correct Answer: C. It is allowed only on a non-repatriable basis. This is an exception mentioned in the prohibited sectors list.

Correct Answer: C. Tobacco product manufacturing. This sector is on the list of prohibited areas for foreign investment.

Correct Answer: B. It is completely prohibited. The syllabus clearly states this restriction.

Correct Answer: B. They need to obtain prior government approval for their investment. This is a specific condition mentioned in the syllabus.

Correct Answer: B. They face additional restrictions in the defence, space, and atomic energy sectors. This highlights stricter regulations for Pakistani investors in sensitive areas.

Correct Answer: C. Equity shares. The syllabus lists equity shares as a type of capital instrument.

Correct Answer: C. Debentures. Debentures are explicitly mentioned as part of capital instruments.

Correct Answer: B. Capital Instruments. Preference shares are included in the definition provided for capital instruments.

Correct Answer: B. Capital Instruments. Warrants are also listed as a type of capital instrument relevant to foreign investment.

Correct Answer: C. The funds invested and any returns can be transferred back to the investor’s home country. This is a key feature for foreign investors.

Correct Answer: C. Global Depository Receipts. GDRs are important instruments for raising capital in international markets.

Correct Answer: B. Negotiable foreign depository receipts traded overseas that can be converted into Indian company equity shares. This accurately describes the nature of GDRs.

Correct Answer: B. An Indian custodian holds the shares on behalf of the GDR holders. This ensures the link between the GDRs and the actual shares.

Correct Answer: B. United States Dollars or other foreign currencies. GDRs are traded internationally, so they are usually in a widely accepted foreign currency.

Correct Answer: C. The overseas investors who have purchased the GDRs. Since GDRs are in foreign currency, the investors are exposed to exchange rate changes.

Correct Answer: C. Indian Rupees. The dividends are initially paid in the currency of the underlying shares, which is Indian Rupees.

Correct Answer: C. The depository that holds the shares on behalf of the investors. The depository usually exercises the voting rights.

Correct Answer: B. Securities and Exchange Board of India (SEBI)-registered brokers can buy shares for GDR conversion up to the original issue level. This describes the specific nature of limited two-way fungibility for GDRs.

Correct Answer: B. ADRs are traded only in the United States, while GDRs are traded in other overseas markets. This is the primary distinction based on trading location.

Correct Answer: C. Indian Depository Receipts. IDRs are instruments for foreign companies to raise capital in India.

Correct Answer: B. Domestic depository receipts representing shares of a foreign company, traded in India. This accurately defines what IDRs are.

Correct Answer: C. Companies (Registration of Foreign Companies) Rules, 2014 and Securities and Exchange Board of India (SEBI) (Issue of Capital and Disclosure Requirements – ICDR) Regulations, 2009. These are the key regulatory frameworks for IDR issuance.

Correct Answer: B. Commercial loans obtained by eligible Indian resident entities from recognized non-resident entities. ECB specifically refers to borrowing from overseas commercial sources.

Correct Answer: B. The rules for ECB currency, instruments, eligibility, maturity, cost, and usage. The RBI framework sets the parameters for ECB transactions.

Correct Answer: C. In Foreign Currency (any freely convertible) or Indian Rupee (INR). ECB offers the flexibility of borrowing in either foreign currency or Indian Rupees.

Correct Answer: D. Foreign Currency Convertible Bonds (FCCBs). FCCBs are a type of debt instrument denominated in foreign currency.

Correct Answer: C. Rupee-denominated bonds issued overseas. These bonds allow foreign lenders to invest in Indian Rupees.

Correct Answer: B. No, for both Foreign Currency (FCY) and Indian Rupee (INR) ECB. Trade credits are eligible only if their maturity is over 3 years.

Correct Answer: D. Loans with a maturity of 5 years. Loans are listed as an instrument for both FCY and INR ECB.

Correct Answer: C. All entities eligible for Foreign Direct Investment (FDI). This is a primary criterion for ECB eligibility.

Correct Answer: B. Port Trusts. Port Trusts are explicitly listed as eligible borrowers.

Correct Answer: C. Registered entities in micro-finance. The syllabus specifies this eligibility for INR ECB.

Correct Answer: C. Residents of Financial Action Task Force (FATF) or International Organization of Securities Commissions (IOSCO) compliant countries. This ensures adherence to international financial standards.

Correct Answer: B. Yes, if they are foreign equity holders of the borrowing entity. Individuals can be lenders under specific conditions.

Correct Answer: C. If they are subscribing to bonds/debentures. This is another specific condition for individuals to be recognized lenders.

Correct Answer: C. Yes, they can lend Foreign Currency (FCY) ECB only. There is a restriction on them lending in Indian Rupees.

Correct Answer: C. 3 years. This is the standard minimum duration for most ECB borrowings.

Correct Answer: B. 1 year. Manufacturing companies below a certain borrowing limit have a shorter MAMP.

Correct Answer: C. 5 years. Borrowing from a foreign equity holder for these specific purposes requires a longer maturity.

Correct Answer: C. 10 years. These end-uses typically require a longer repayment period.

Correct Answer: B. 7 years. Repaying capital expenditure loans through ECB has a specific MAMP.

Correct Answer: C. 10 years. Repaying non-capital expenditure loans through ECB has a longer MAMP compared to capital expenditure.

Correct Answer: C. Benchmark Rate + 500/550 basis points (bps) spread. This sets the maximum permissible cost for FCY ECB.

Correct Answer: B. Benchmark Rate + 450 basis points (bps) spread. The cost ceiling for INR ECB is different from FCY ECB.

Correct Answer: B. For borrowers with investment-grade ratings (time-bound). This provides some flexibility for highly rated borrowers.

Correct Answer: B. 2% over the contracted interest rate. This caps the penalty for early repayment.

Correct Answer: C. Real estate activities. This sector is typically restricted for ECB funding.

Correct Answer: C. No, capital market investments are a prohibited end-use. ECB is generally meant for productive investments.

Correct Answer: B. Yes, subject to specific exceptions and conditions. While generally restricted, there are certain scenarios where it’s permitted.

Correct Answer: C. The rate on the agreement date or a lower rate. This provides a degree of certainty regarding the exchange rate.

Correct Answer: C. The rate on the settlement date. This is the relevant date for INR transactions.

Correct Answer: C. Mandatory hedging is required for Foreign Currency (FCY) External Commercial Borrowing (ECB) with maturity below 5 years. This mitigates exchange rate risk for shorter tenors.

Correct Answer: B. Yes, they are permitted to hedge their exposure using permitted derivatives. This allows foreign investors to manage their currency risk.

Correct Answer: B. They must have a Board-approved risk management policy for External Commercial Borrowing (ECB). This emphasizes the importance of managing risks associated with ECB.

Correct Answer: B. It counts towards meeting hedging requirements by offsetting expected cash flows. If a borrower has offsetting foreign currency earnings, it can reduce the need for formal hedging.

Correct Answer: B. USD 750 million (temporarily increased to USD 1.5 billion as of source date). This is the limit for ECB that can be availed without prior RBI approval.

Correct Answer: C. ≤ 7:1. This ratio restricts the amount of debt a company can take relative to its equity from a foreign equity holder.

Correct Answer: C. No, Indian banks cannot issue guarantees for ECBs. This is a specific restriction under the ECB framework.

Correct Answer: C. No, financial intermediaries are prohibited from investing in FCCBs/FCEBs. This is another specific restriction.

Correct Answer: B. Yes, changing ECB currency from one FCY to another FCY is permitted. This provides flexibility to borrowers.

Correct Answer: C. No, changing ECB currency from Indian Rupee (INR) to Foreign Currency (FCY) is NOT permitted. This restriction aims to manage foreign exchange outflows.

Correct Answer: B. Credit extended by overseas suppliers, banks, or financial institutions to Indian residents for importing goods. TC is specifically for financing imports.

Correct Answer: B. Buyers’ Credit and Suppliers’ Credit. These are the two main types of trade credit.

Correct Answer: C. Foreign Currency (FCY) or Indian Rupee (INR). TC offers flexibility in currency denomination.

Correct Answer: B. A person resident in India acting as an importer. The borrower must be an Indian resident engaged in importing.

Correct Answer: C. Up to USD 150 million. Specific sectors have a higher limit for automatic route TC.

Correct Answer: B. Up to USD 50 million. A lower limit applies to general importers under the automatic route.

Correct Answer: C. Overseas suppliers, banks, financial institutions, foreign equity holders. A wide range of entities can provide trade credit.

Correct Answer: C. Up to 3 years from the shipment date. Capital goods imports can have a longer TC period.

Correct Answer: B. Up to 1 year from the shipment date or the operating cycle, whichever is less. This period is shorter for non-capital goods.

Correct Answer: C. Up to 3 years from the shipment date. Shipyards/shipbuilders have a longer period for non-capital goods compared to other importers.

Correct Answer: C. Benchmark Rate + 300 basis points (bps). This sets the maximum cost for new FCY TC.

Correct Answer: B. Benchmark Rate + 250 basis points (bps). The cost ceiling for INR TC is different from FCY TC.

Correct Answer: C. Benchmark Rate + 350 basis points (bps). A specific ceiling is provided for the LIBOR transition.

Correct Answer: C. The exchange rate on the agreement date, or a lower rate if the lender agrees. This provides a favorable option for the borrower.

Correct Answer: C. The exchange rate prevailing on the settlement date. This is the standard practice for INR transactions.

Correct Answer: B. They must follow guidelines for foreign currency exposure hedging and have a Board-approved risk management policy. This emphasizes the need for managing currency risk.

Correct Answer: C. Yes, they can hedge using permitted derivatives with Authorised Dealer (AD) Category I banks in India. This allows lenders to manage their currency risk.

Correct Answer: B. Yes, it can be changed from one freely convertible foreign currency to another, or to Indian Rupee (INR). This offers flexibility in currency management.

Correct Answer: C. No, changing from Indian Rupee (INR) to any foreign currency is NOT permitted. This restriction helps in managing foreign exchange outflows.

Correct Answer: B. Yes, banks are permitted to issue Rupee Denominated Bonds (RDBs) overseas. This allows banks to raise capital in Indian Rupees from overseas investors.

Correct Answer: C. Perpetual Debt Instruments (PDIs) for Additional Tier I capital (Basel III). This is one of the stated purposes for issuing RDBs.

Correct Answer: B. Cannot exceed 49% of the bank’s total eligible Additional Tier 1 capital. This sets a cap on the amount of AT1 capital that can be raised through overseas RDBs.

Correct Answer: C. They are excluded from the investment limits set for Foreign Portfolio Investors (FPIs) in corporate bonds. This provides an additional avenue for banks to raise capital.

Correct Answer: C. Compliance with Reserve Bank of India (RBI) prudential norms and Foreign Exchange Management Act (FEMA) guidelines. Banks must adhere to both RBI and FEMA regulations for RDB issuance.