The government's attitude towards foreign investment has changed significantly during the last decade. Until the 1980s, foreign investment was permitted only in cases where a desired technology was not obtainable on any other terms. During the 1980s, however, the government began taking amore liberal attitude. Foreign investment was allowed on a case-by-case basis. The normal ceiling for foreign investment was 40 percent of the total equity capital, but a higher percentage of foreign equity was permitted in certain industries if the technology was sophisticated and available in the country or if the venture was largely export-oriented.

The 1991 New Industrial Policy Statement specifically mentions that foreign investment in the interest of the country's industrial development will be welcome. Foreign equity investment not only has been delinked from transfer of technology but is being actively sought in a wide range of highpriority industries, critical infrastructure sectors and export-oriented businesses.

While foreign investment still requires government approval, automatic approval is granted in specified high-priority industries for up to 51 percent direct foreign investment and in trading companies engaged primarily in export activities. Existing foreign-participation companies are allowed automatic approval for an increase in foreign equity from existing levels to 51 percent though the issue of additional capital if they are exclusively engaged in a high-priority industry or the increase is part of an expansion program in a high-priority industry.

Another initiative taken by the government was the establishment of the Foreign Investment Promotion Council under the Industry Ministry of undertake promotional activity to attract foreign direct investment. The members of the Council are professionals and experts from industry and commerce. It has Ben set upto undertake a more target-oriented approach toward promotion of foreign direct investment. The Council is expected to identify sectors where large inflow of foreign direct investment would have the maximum beneficial effect for the economy and to target specific regions and countries of the world from where FDI can be attracted through special efforts.

A review of foreign collaboration approvals since liberalization shows that the government is serious in its resolve to encourage foreign investment and is flexible in allowing higher levels of foreign equity participation. The level of foreign equity participation. The level of foreign equity participation allowed in recent years ranges up to 100 percent.

Until recently, Foreign Exchange Regulatory Act (FERA) companies (i.e., companies registered in India with more than 40 percent nonresident interest) were subject to various restrictions and were required to obtain approvals for various purposes. However, these restrictions have by and large been lifted, placing these companies on a part with wholly Indian-owned companies.

Earlier, the government did not favor the conduct of operations by foreign companies (other than banks, airlines and shipping companies) through a branch. This policy has recently been liberalized, and foreign manufacturing and trading companies are permitted to open branch offices in India for specified activities (see "Foreign enterprise entitles"). The government is now allowing more foreign banks to operate in the country and permitting those with existing Indian operations to expand their branch network.

The Indian stock markets, which were virtually closed to foreign investors until 1992, have been opened to foreign institutional investors (FIIs). The government has announced a set of guidelines under which FIIs are able to make investments in the capital market up to specified amounts of the issued capital of companies and obtain the benefits of a concessional tax regime. Indian companies are now allowed, with prior permission from the government, to raise funds from international capital markets. Several companies have taken advantage of this and raised funds successfully.

For all approved foreign investments, except for consumer products industries where there is a requirement for dividend balancing in the initial period there is complete freedom for remittance of profits and dividends, as well as for repatriation of capital, subject to exchange control rules and taxation.

Free trade has been the government's basic policy, but protectionism has prevailed where national interests were strong in spite of the relatively high cost of some locally manufactured goods. The government announced its intention of reducing protection for domestic industry in 1991 and has followed up with a variety of measures, including substantial reduction in import licensing, decanalization of imports and exports, and substantial lowering of tariffs.

International trade continues to be regulated to avoid a drain of foreign exchange reserves and to discourage the import of nonessential and luxury items. However, over 90 percent of the country's imports are now outside licensing control.

The rupee has been made convertible on the current account, and the exchange rate is market-determined.

Imports of raw materials, components, consumables, spare parts, and capital goods, except for a short negative list, can be made freely. Imports of consumer goods continues to be restricted.

No special aspects of the tax regime favor or discourage foreign investment. Companies with foreign participation incorporated in India are generally entitled to the same incentives and liable for the same taxes as local investors, irrespective of percentage of foreign shareholding (subject, however, to double taxation relief in accordance with the terms of relevant tax treaties). However, foreign corporations doing business in India through branch are taxed at higher rates.

The attitude of local business and industry toward foreign investment is generally neutral to positive, except where a direct threat to their business is perceived. Indian businesspeople recognize that foreign investment can bring in new and proven technology India may not have. The attitude of Indian investors to foreign investment in their enterprises is favorable, particularly if it would involve improvements in technology or improve access to international markets.

Labor's attitude toward foreign investment and management is generally favorable because of a perception of greater professionalism in foreign companies. Until recently, foreign-managed companies offered higher wages than their local counterparts, and this perception also lingers.

Located strategically in South Asia, India provides a favorable location for a multinational's Asian expansion program. As the second most populous nation in the world, it also offers a vast domestic market for manufactured products. The country has abundant industrial raw materials; a well-diversified manufacturing base; a large pool of moderate-cost skilled manpower, including professional managers; and an established free-market system.

Investment opportunities exist in high-technology industries, including telecommunications, professional electronics and industrial electronics; core industries, such as energy, steel and petrochemicals, which have been opened up for private investment; export-potential industries, such as food processing, drugs, software, and engineering; and services such as health, tourism and financial services.

A comparative research study carried out by Price Waterhouse India on the Foreign Direct Investment (FDI) environment in selected Asian countries shows that India now offers a favorable policy environment in comparison with most competing FDI destinations, although the operating regulatory and taxation environments require substantive reform. The major positive points of the Indian policy environment for FDI are a generally liberal and flexible attitude toward the level of foreign investment, the stability allowed in the level of foreign participation, and the flexibility allowed to foreign-participated enterprises incorporated with the country.

Foreign investment is welcome in areas considered to be in the national interest, especially in critical infrastructure and core sectors, high-technology areas and export-oriented ventures. Foreign investment in these areas is actively sought, and there is flexibility in considering proposals for substantial investments from large international firms providing access to high technology and world markets.

In high-priority industries, automatic approval is given for foreign investment up to 51 percent of the common stock of a company and for trading companies primarily engaged in export activities that meet prescribed criteria. Higher equity holdings and foreign investment in areas outside identified high-priority industries are considered on their merits. A foreign holding 100 percent is allowed in the power sector or for industrial units set up in free-trade zones or as 100 percent export-oriented units. Foreign investment is also welcome in the hydrocarbon sector, oil, and natural gas. A special scheme for nonresident Indians and overseas corporate bodies primarily owned by them permits 100 percent ownership of common stock in high-priority industries.

For an investment to quality for automatic approval, the imported capital goods must no be secondhand.

Transfer of technologies not required for approving foreign investment.

A local joint venture partner is not mandatory.

Well-developed capital markets enable dispersed shareholding through public issues where 100 percent foreign ownership of common stock is not favored.

Companies registered in India with foreign shareholding are in effect treated on a par with wholly Indian-owned companies.

Certain sectors are reserved to the state for strategic reasons, but even within some of these sectors the government is selectively permitting foreign investment.

Foreign investment beyond 24 percent ownership of common stock is not ordinarily allowed in industries reserved for the small-scale sector.

While any foreign investment requires prior approval, proposals in high-priority industries or for trading companies primarily engaged in export activities that meet prescribed criteria can obtain automatic approval from the Reserve Bank of India. Applications for approval of the foreign investment proposals may be made to the Secretariat for Industrial Approvals in the Ministry of Industry.

There are separate procedures for units in export-processing zones and technology parks and for 100 percent export-oriented units.

A corporation incorporated in India with a permissible level of foreign shareholding is the favored type of business structure.

A branch of an overseas company may be set up to serve as a buying or selling agent and to undertake export and import trading activities.

Setting up manufacturing facilities has been the most favorable route, because it is perceived to bring modern technology into the country.

An alternative route is to take over the foreign shareholding in the Indian company, either directly (requiring clearance from the Reserve Bank of India) or through a change in control of the overseas holding company.

Other commonly used routes include the takeover of an existing business by a newly incorporated company, purchase of shares in an existing company under a private arrangement or solicitation of foreign shareholding through a fresh issue of capital in an existing company, after obtaining necessary clearances.

For a foreign investor, acquisition solely through a public takeover bid is virtually impossible due to exchange control restrictions, unless the bid is routed through an Indian subsidiary. However, the purchase of shares in an existing listed company may be accompanied by an obligation to make a purchase offer to the public shareholder.

All investment incentives (but no special tax incentives) are available to foreign-participation enterprises.

Several tax and nontax incentives are available for investment in manufacturing facilities. In addition, there are special incentives for export-oriented industries, including tax exemption on export profits and duty-free imports.

Investment is encouraged in sophisticated technology or export-oriented industries and in export-processing zones. Incentives for and attitudes to investors vary somewhat from state to state. New projects other than in nonpolluting industries are generally required to be located at least 25 kilometers outside the urban limits of cities with a population over 1 million according to the 1991 Census, or they may be located in more proximate designated industrial areas.

All local sources of financing are available to foreign-participation enterprises.

Overseas borrowing is regulated and requires government permission.

Overseas issuance of convertible bonds and equity is allowed on a selective basis.

Capital and profits maybe freely remitted for approved foreign investments, subject to taxation and exchange control formalities. Dividend outflow in consumer-goods industries is required to be balanced by export earnings over a period of seven years from the commencement of production. This requirement can be met, however, through trading in rather than manufacture of exports of any priority-industry item. The dividend-balancing requirement is temporary and is expected to be removed when the restriction on import of consumer goods are lifted.

Foreign investors should in general plan their Indian operations through a company incorporated in India. Branch operations are permitted for certain specified activities. A branch attracts tax at a rate higher than that applicable to domestic companies. Liberal incentives are available for exports.

Skilled manpower and professional managers are available at a comparatively moderate cost. As a general rule, labor, although important, is not the most significant element in total production costs.

Market studies are advisable and sometimes essential. Secondary data sources are limited, and data available with them may be date and in some cases of uncertain reliability. Responses to mail or telephone questionnaires are poor and often vague, and personal contact surveys are usually needed.

Because of its exchange control regulations, India is not an international financial center.

The current trend - significant liberalization of industrial policy, foreign investment policy and bureaucratic controls, with substantial elimination of quantitative restrictions, lowering of tariff barriers and greater reliance on market mechanisms-is expected to be sustained.