India has raised the limit for foreign direct investment in telecoms companies from 49% to 74%.
The mobile market is set for growth
Communications Minister Dayanidhi Maran said that there is a need to fund the fast-growing mobile market.
The government hopes to increase the number of mobile users from 95 million to between 200 and 250 million by 2007.
"We need at least $20bn (£10.6bn) in investment and part of this has to come as foreign direct investment," said Mr Maran.
The decision to raise the limit for foreign investors faced considerable opposition from the communist parties, which give crucial support to the coalition headed by Prime Minister Manmohan Singh.
Potential foreign investors will however need government approval before they increase their stake beyond 49%, Mr Maran said.
Key positions, such as those of chief executive, chief technology officer and chief financial officer are to be held by Indians, he added.
Analysts and investors have welcomed the government decision.
"It is a positive development for carriers and the investment community, looking to take a longer-term view of the huge growth in the Indian telecoms market," said Gartner's principal analyst Kobita Desai.
"The FDI relaxation coupled with rapid local market growth could really ignite interest in the Indian telecommunication industry," added Ernst and Young's Sanjay Mehta.
Investment bank Morgan Stanley has forecast that India's mobile market is likely to grow by about 40% a year until 2007.
The Indian mobile market is currently dominated by four companies,
Bharti Televentures which has allied itself with Singapore Telecom, Essar which is linked with Hong Kong-based Hutchison Whampoa, the Sterling group and the Tata group.