A special relationship

India's historical context has a direct bearing on its present, says Tony Khindria. Tony Khindria is senior partner of Lexindia and is the author of Foreign Direct Investment in India (Sweet & Maxwell). India is likely to be the most populous country in the world within a few decades. Like China, it represents one of the largest remaining markets for developing countries.

Even today, it has an estimated middle class of between 150 to 200 million people. Naturally, foreign governments and companies are eager for India to speed up the opening of its market.

However, that is only one side of the coin. When approaching the Indian market, it is useful to remember a little bit of the background.

India celebrated 50 years of independence this year. In the decades before independence, it suffered from intermittent famine and plagues and on independence over one million people were killed in the cross-exodus of Muslims and Hindus between what are now Pakistan and India.

The Indian agenda on independence was one of self-reliance. Mahatma Gandhi had envisaged an India where the rural economy played a prominent part. Jahwarlal Nehru and the Congress Party, the party that has ruled India until recent years, stressed a planned economy, based partly on the Soviet model, in which resources and production, notably of essential items, were mainly controlled or supervised by government.

The idea was that, in a poor country, such resources had to be carefully distributed, but this inevitably led to charges of corruption of those in government whose job it was to allocate licences to operate – both to Indians and to foreigners.

Foreign investment became very strictly controlled and, in the 1970s, most of the foreign companies that were already in India were required to become minority shareholders.

A transfer of technology was also usually required in a project which included foreign investment. Outside the public sector, the industrial infrastructure fell into the hands of a few families.

Given the past and the sheer size of the country, India has not done badly, and much progress has been made to date: India is self-sufficient in food and has a large number of technically qualified people.

Facing pressure from the international financial institutions and recognising that the country was not developing at a satisfactory rate, in 1991 India liberalised its central control of the production process and also its policy towards foreign investment. Many industries were de-licensed, which meant that they could be set up without government permission. This made life easier for Indian industrialists.

Under the terms of the 1991 policy, in 34 “priority” industries, foreign investment of up to 51 per cent of the voting shares of a company is automatically permitted, provided certain criteria are met.

There is no requirement of transfer of technology for these industries. Automatic permission for transfer of technology is given in these industries where certain criteria are met.

The government is also open to applications for foreign investment which do not meet the above criteria and, notably in infrastructure or other projects which are important for the country, are happy to consider foreign investment well in excess of 51 per cent of the voting shares – even up to 100 per cent.

Last week, the government announced a consolidated list whereby automatic permission is given for foreign investment in certain industries on three levels: up to 50 per cent, 51 per cent and 74 per cent. The government's aim is to provide some certainty to potential investors and to reduce the scope for corruption.

In line with its commitments under the multilateral trade agreements, India has partly opened its markets to foreign goods by allowing the import of a wide range of articles at lower import duties. Evidence of this new attitude can be seen at

Indian airports, where the customs officials no longer search every pocket for forbidden computers and similar items. The government plans to allow patents on drugs by 2004 and has started to legislate to that effect. Today, drug patents are only available on processes.

This is not to say that a completely open-door policy has been adopted. The law that governs foreign investment is the Foreign Exchange Regulation Act 1973. This gives the government the power to determine its exchange control policies in either direction, be they more liberal or restrictive. But successive governments have maintained the liberalisation process and, unless there is a major upheaval, it seems unlikely that there will be a reversal.

When applying to the Indian authorities for investment remember that foreign investment may not be at the top of their priority list. Issues such as education (India only has about a 50 per cent literacy rate), employment, and health (only those in employment have any real cover) are in the foreground of Indian preoccupations.

As Indian commercial law is largely based on English law with common law principles, it should present no conceptual difficulties for the Anglo-Saxon lawyer.

The UK, despite, or because of, its historical tryst with India, benefits from a special relationship which it could develop to enhance not only its own commercial and political status in the region but also perhaps that of Europe as a whole.