We studied about the unprecedented economic crisis faced by the country in 1991-92, and the far-reached package of corrective measures that started to be introduced from that time to turn the tides and put the country on solid footing, that are identified as the "Reforms". The effect of these reforms are to free the economy from excessive state control and render it market oriented. These are also intended to integrate the Indian economy with that of the Global economic system. The far reaching beneficial effect of these reforms is evidenced by the surge in our foreign reserves which dipped to the alarming level of 50 million in 1991 to the present 73 billion dollars(May '03)

As the centerstage of the reforms Government totally revised the Industrial Policy, introduced as per IPR 1948. The Industrial Policy, 1991, announced by the Government of India on 25th July, 1991, liberalised the laws regulating domestic industry and took measures to promote foreign investment with a view to make Indian economy more dynamic and to provide free business environment. Approval for direct foreign investment is granted upto 51% foreign equity in high priority industries. Some of the salient features of the Industrial Policy of 1991 are as follows:

• Abolition of industrial licensing in all but sixteen industries.

• Dilution of the provisions of the MRTP Act.

• Opening up of the general core and basic industries to the private sector.

• Oil and natural gas sector open for foreign investment and sophisticated technology.

• No investment limit for large Indian/Foreign companies.

• Investment limit in small scale sector Rs. 60 lakhs (US$ 142,0000)

• Automatic approval for foreign investment up to 50 per cent in the mining sector.

• Private participation has been invited in leasing of port equipment operation and maintenance of container terminals, cargo landing terminals, creating warehouse and storage facilities, transportation within ports, setting up of the private berths by coast based industries, ship repairs and maintenance.

• Without prior approval, foreign investors can now own upto 24 per cent equity in any Indian firm and upto 20 per cent in a new private bank.

• Automatic permission will be given by Reserve Bank of India (RBI) for foreign technology agreements in high priority industries up to a lumpsum payment of Rs. 10 million, 5% royalty for domestic sales and 8% for exports subject to total payment of 8% of sales over a 10 year period from date of agreement or 7 years from the commencement of production. The prescribed royalty rates of taxes will be calculated according to standard procedures.

The Industrial Policy 1991, is based on the view that while freeing Indian Industry from official controls, opportunities for promoting foreign investments in India should also be fully exploited. It is felt that foreign investment would bring attendant advantages of technology transfer, marketing expertise, introduction of modern managerial techniques and new possibilities for promotion of exports.

The salient features of the policy, which would assist in achieving such an objective are outlined below:-

1. Approval will be given for direct foreign investment upto 51% foreign equity in 36 high priority industries. There shall be no bottlenecks of any kind in this process. Such clearance will be available if foreign equity covers the foreign exchange requirement for imported capital goods. Consequential amendments to the Foreign Exchange Regulation Act , (1973) have been carried out.

2. Other Foreign equity proposals, including proposals involving 51% foreign equity which do not meet the criteria in para (i) above, will continue to need prior clearance. Foreign equity proposals now need not necessarily be accompanied by foreign technology agreements.

3. To provide access to international markets, majority foreign equity holding upto 51% equity will be allowed in trading companies which are primarily engaged in export activities and such trading houses shall be at par with domestic trading and export houses in accordance with the Import-Export Policy.

4. A special empowered investment promotion board has been constituted to negotiate with a number of large international firms and approve direct foreign investment in select areas. This special programme is aimed to attract substantial investment that would provide access to high technology & world markets.

5. Recently, in a major initiative taken by the Government of India, in the field of capital market, a new scheme is introduced in India, which will make foreign investment in stock market easier. This scheme allows foreign institutional investors (FIIs) to invest in securities trade in the primary and secondary markets, including the equity & other securities listed or to be listed on the stock exchanges in India as also Over The Counter Exchange of India (OTCEI). FIIs include institutions such as pension funds, mutual funds, investment trusts, asset management companies, nominee companies & incorporated portfolio managers. The securities include shares, debentures, warrants and the schemes floated by domestic mutual funds.

6. To consolidate the reforms and to give a fillip to the liberalisation process, the Government of India has by an act of Parliament amended the Foreign Exchange Regulation Act, 1973 (FERA), substantially diluting its regulatory provisions and bringing it in line with the new liberalised industrial, trade and exchange rate policies. The legislation is presently titled as FEMA (Foreign Exchange Management Act)

7. The amendment has removed a large number of restrictions on companies with more than 40% non-resident equity, removed FERA controls of Indian firms setting up joint ventures abroad and allowed Indians to hold immovable property abroad, subject to certain conditions to be stipulated by the RBI.

8. Foreign companies are now permitted to open branch offices in India. These can be for the purpose of representing the parent company or another foreign company in India, conducting research, undertaking export and import trading activities as well as for promoting possible technical and financial collaborations between India and foreign companies. Government control over disinvestment of equity by foreign investors has been relaxed and such disinvestment is now permitted at market price for listed shares. Reserve Bank of India approval is required for the disinvestment price of unlisted shares.

9. The liberalised foreign investment policy is complemented by the new trade policy. The main aim of the policy is to enhance the competitiveness of the Indian economy and globalise India's foreign trade by providing greater transparency and a vastly simplified procedural framework. In addition, licensing requirements for industrial inputs have been removed, allowing free access to capital goods, raw materials, spares, components and other items.

The Government of India issues from time to time a list of industries indicating "where foreign investments may be permitted". The lists so issued are illustrative only. No doubt, a broad technology base has been made in the country, yet a need to update the production technology may arise due to constant technological advancements in the developed countries. The Government of India (Foreign Investment Promotion Board) also considers import of technology in industries listed in Annexure III of the Industrial Policy, in which foreign investments and technical collaborations are freely allowed.

Approvals for foreign participation is now available upto 51 per cent on an automatic basis. The exceptional case exists where special expertise, skill of facilities have been developed which are not readily available indigenously. Where significant contribution is made to exports, foreign holdings can be higher, even upto 100 per cent.

The equity participation is to be justified having regard to factors like priority of the industry, the nature of the technology involved, whether it will enable or promote exports which may not otherwise take place and the alternative terms available for securing the same or similar technology transfer. As stated above Foreign equity participation is now allowed upto 51 per cent, with the possibility of a higher percentage according to the proposal. In projects where imported capital goods are required, automatic clearance will be given;

1. in cases where foreign exchange availability is ensured through foreign equity, or

2. if the CIF value of imported capital goods required is less than 25 per cent of total value (net of taxes) of plant and equipment, upto a maximum value of Rs. 2 crore. In other cases, imports of capital goods will require clearance from the Secretariat for Industrial Assistance (SIA) in the Department of Industrial Development according to availability of foreign exchange resources.

In January 1998 the Government of India has further liberalised foreign direct investment by dispensing with the requirement of prior approval of the Reserve Bank of India in cases covered by automatic approval scheme. In all such cases the shares can be issued to the foreigner and foreign companies without the prior approval of the Reserve Bank of India. Now certain information need to be furnished to the Reserve Bank of India after the issue of the shares.

Investment In Trading Company

Majority foreign investment upto 51% in trading companies primarily engaged in export activities is also now welcomed and permission from the Reserve Bank of India is available on an automatic basis.

The following modifications of FII guidelines dated 14.9.92 in general and paragraph 9 (f) and paragraph 18 of those guidelines in particular are issued by way of clarification in the light of the enactment of section 115 AD of the Income Tax Act through the Finance Act, 1993.

The taxation of income of Foreign Institutional Investors from securities or capital gains arising from their transfer for the present, shall be as under:-

1. The income received in respect of securities (other than units of Offshore funds covered by section 115 AB of the Income-Tax Act) is to be taxed at the rate of 20%.

2. Income by way of long-term capital gains arising from the transfer of the said securities is to be taxed at the rate of 10%.

3. Income by way of short-term capital gains arising from the transfer of the said securities is to be taxed at the rate of 30%.

4. The rates of income-tax as aforesaid will apply on the gross income specified above without allowing for any deduction under sections 28 to 44-C, 57 and chapter VI-A of the Income-Tax Act.

The expression "securities" referred to above shall have the meaning assigned to it in clause (h) of section 2 of the Securities Contract (Regulation) Act, 1956. These include;

1. Shares, scrips, stocks, bonds, debentures, debenture stocks or other marketable securities of a like nature in or of any incorporated or other body corporate:

2. Government securities; and

3. Rights or interests in securities

4. Foreign Investment In Securities

On this new path of liberalisation of the Indian economy, portfolio investments by Foreign Institutional Investors (FIIs) in primary or secondary markets is allowed subject to a ceiling of 24 per cent of issued share capital for the total holdings of all registered FIIs in any one company. The ceiling would apply to all holdings taking into account the conversions out of the fully or partly convertible debentures issued by the company. Also the holding of a single FII in any company would also be subject to a ceiling of 5 per cent of total issued capital. For this purpose, the holding of an FII group will be counted as single FII. Further the maximum holding of 24 per cent for all nonresident FIIs will also include NRI and OCB investments but will not include Offshore Single Regional Funds, Global Depository Receipts and Euro Convertible Bonds.

The most important feature of the guidelines laid down by the Finance Ministry , Government of India is that there will be no restriction on the volume of investments of FIIs and no lock-in period prescribed for the purposes of such investments made by FIIs.

Changes have been made in the foreign investment policy to create a more favourable fiscal environment for foreign collaborations and investment in virtually every sector of the economy except those selected industries reserved for the public sector. The obstacles that once stood in the way of foreign collaborations are becoming things of the past. The procedures for approval from the Government are being constantly simplified to make investments more attractive and beneficial.