Openness to Foreign Investment

Post-independence scenario
India's post-independence economic policy combined a vigorous private sector with state planning and control, treating foreign investment

as a necessary evil. Prior to 1991, foreign firms were allowed to enter the Indian market only if they possessed technology unavailable in India. Almost every aspect of production and marketing was tightly controlled, and many of the foreign companies that came to India eventually abandoned their projects.

New policies
The industrial policy announced in July 1991 was vastly simpler, more liberal and more transparent than its predecessors, and it actively promoted foreign investment as indispensable to India's international competitiveness. The new policy permits automatic approval for foreign equity investments of up to 51 percent, so long as these investments are made in one of 35 "high priority" industries that account for the lion's share of industrial activity.

Hassles earlier
Prior to 1991, foreign equity participation was limited to 40 percent, and foreign investors were saddled by numerous operating constraints. Foreign equity investments in excess of 51 percent, or those which fall outside the specified "high priority" areas, must be approved by the Foreign Investment Promotion Board (FIPB) and approved by a Cabinet Committee.

Constraints: too many
The government on occasion has denied requests for a foreign equity stake exceeding 51 percent. Non-resident Indians (NRI's) and Overseas Corporate Bodies (firms with NRI majority ownership) may hold 100 percent ownership in all industries except those reserved for the public sector.

These reserved industries are:

• arms,
• ammunition and defense equipment;
• atomic energy;
• mineral oils;
• minerals used in atomic energy; and
• railway transport.

Improved conditions
To allow more NRI investments, the GOI recently allowed repatriation of investment in all activities, except agriculture and plantations, subject to certain conditions. As of June 1995, NRIs and OCBs may invest on a repatriable basis in new issues of shares/debentures only of industrial or manufacturing companies.