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NEW DELHI, June 27

THE Government is planning to extend the definition of foreign direct investment (FDI) to include reinvested earnings by overseas investors and also their borrowing and lending transactions with their subsidiaries in the country.

The aim of this reclassification is to provide a more authentic picture of FDI flows into the country and also to align these with the International Monetary Fund's definition of FDI. This is a mandatory requirement considering that India is also a subscriber to the IMF's Special Data Dissemination Standard (SDDS) established in 1996, officials said.

The proposed reclassification will boost the annual flows of FDI into India by an additional $1.5 billion to $2 billion, thus making up for a total FDI inflow of over $6 billion this year. In fiscal 2001-02, FDI flows topped the $4-billion mark. Portfolio investment, on the other hand, aggregated close to $2 billion.

The IMF's definition of FDI includes equity capital, reinvested earnings and other direct investment capital. Equity capital covers equity in branches all shares in subsidiaries and associates (except non-participating preferred shares that are treated as debt securities) and other capital contributions.

Reinvested earnings consist of the direct investors share of earnings not distributed as dividends by subsidiaries or associates and earnings of branches not remitted to the direct investor. Other direct investment capital (or inter-company debt transactions) covers the borrowing or lending of funds between direct investors and subsidiaries, branches and associates.

The IMF manual defines direct investment as an international investment in which a resident entity in one country obtains a lasting interest in an enterprise resident in another country.

A lasting interest implies the existence of a long-term relationship between the direct investors and the enterprise and a significant degree of influence by the investor on the management of the enterprise.

The criteria used here is that "a direct investment is established when a resident in one economy owns ten per cent or more in the ordinary shares or voting power for an incorporated enterprise or the equivalent for an unincorporated enterprise."

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