And when an inspector asked about the contents of unlabelled vials in the laboratory glassware washing area, a plant worker dumped them down a sink and said the contents could not be determined, according to a July 18 letter from the U.S. Food and Drug Administration to Wockhardt (>> Wockhardt Limited), which makes sterile injectable drugs and various forms of insulin.

Habil Khorakiwala, chairman of Wockhardt, last week told shareholders that the problem at its Waluj plant "is an inexcusable lapse, but we have taken swift and definitive action, both corrective and pre-emptive," including appointment of a new quality chief and hiring of outside consultants.

India's drugmakers, battered by a rash of U.S. regulatory rebukes including a record fine for Ranbaxy Laboratories Ltd (>> Ranbaxy Laboratories Limited), face closer FDA scrutiny as the agency ramps up its presence in the country.

Increased on-the-ground oversight reflects India's growing importance as a supplier to the United States, and should ultimately bolster quality and confidence in Indian-made drugs.

In March, India allowed the FDA, guardian of the world's most important pharmaceuticals market, to add seven inspectors, which will bring its staff in India to 19. India produces nearly 40 percent of generic drugs and over-the-counter products and 10 percent of finished dosages in the United States.

"As more trade happens, as more drugs are approved and applications are submitted we will have to inspect more," Altaf Lal, the new FDA office director for India, told Reuters.

"Many Indian firms fairly well understand and they know good manufacturing practices. The problems we have seen with some companies are why we choose to make quality as one of our highest priorities," he said.

The FDA's stepped-up presence should also accelerate what some in the domestic industry hope is a more rigorous attitude towards compliance in a country whose cheap generics have made it the low-cost pharmacy to the world.

In the near term, it means Indian drugmakers could be more frequently hit by enforcement measures or inquiries, unnerving investors.

RANBAXY'S SHADOW

Shares of Ranbaxy, controlled by Japan's Daiichi Sankyo Co (>> DAIICHI SANKYO COMPANY, LIMITED), fell as much as 42 percent in the months after it pleaded guilty in May to U.S. felony charges related to drug safety and agreed to $500 million in fines.

Ranbaxy, India's biggest drugmaker by sales, remains barred from making U.S. shipments from its plants at Dewas and Paonta Sahib. Ranbaxy has said the implementation of a consent decree it signed in January 2012 with the FDA to restart shipments has "progressed as per plan".

While Ranbaxy shares have recovered, the case put a cloud over the industry.

"We all know how Indian companies function and issues such as Ranbaxy and other import alerts have brought us a very bad reputation globally," said Ajay Kumar Sharma, director of research at the Organisation of Pharmaceutical Producers of India.

The urgency to be first with a generic version of a drug coming off patent is the main reason for quality problems, Sharma said. The company that first launches such a drug enjoys a 180-day exclusivity period, which can be lucrative for the generic version of a commercial blockbuster.

"We need to be sincere towards quality issues rather than following procedures just for the sake of it," said Sharma. "We are doing things fast but then losing out on certain aspects and facing import alerts."

INSPECTIONS AND VOLATILITY

Wockhardt's once-soaring shares fell as much as 79 percent in the months after the announcement of an "import alert" banning shipments from the Waluj factory in May. By the middle of this week, the stock was down nearly 59 percent.

On July 31, Strides Arcolab (>> Strides Arcolab Limited) shares fell as much as 17 percent on worries over FDA scrutiny of its manufacturing practices, although the Indian company said on that day that it had answered the FDA's queries, made in a so-called form-483 letter, and continued to make U.S. shipments. Its stock has more than recovered.

The FDA's power cuts both ways. Last week, IPCA Laboratories (>> IPCA Laboratories Ltd) shares gained 7.6 percent on the day it said the FDA had cleared its oral solid formulations plant in Indore for U.S. shipments. In November, IPCA had voluntarily reported "non-conformances" at the plant to the FDA.

"More inspectors initially could mean some more enforcement actions, but eventually that would end up meaning even fewer enforcement actions going forward," said Macquarie analyst Abhishek Singhal.

OBAMACARE AND EXPORTS

India is the biggest overseas source of medicines to the United States and is home to over 150 FDA-approved plants, including facilities run by global players. Pharmaceutical exports from India to the United States rose nearly 32 percent last year to $4.23 billion.

As U.S. demand for generics grows, especially under President Barack Obama's healthcare programme, the FDA is under pressure to clear product applications while ensuring quality.

New U.S. legislation requires the agency to inspect global plants on the same schedule as domestic facilities, and to clear its backlog of drug applications within five years. Indian firms account for more than one-third of U.S. drug approval filings.

Lupin Ltd (>> Lupin Limited) was the top Indian drug seller in the U.S. market last year by prescriptions, followed by Dr. Reddy's Laboratories (>> Dr. Reddy's Laboratories Limited), Cadila Healthcare (>> Cadila Healthcare Limited) and Aurobindo Pharma (>> Aurobindo Pharma Ltd), according to IMS Health. All have had past FDA run-ins.

In May 2009, Lupin received a warning letter from the agency over deficiencies at a plant in Bhopal, which it resolved in January 2010. Last year, the FDA lifted an import alert at a Mexican plant owned by Dr. Reddy's.

In 2011, Cadila's parent received an FDA warning letter over its plant in Ahmedabad, which was resolved last year. In March, the FDA lifted an import alert that it imposed in 2011 on non-sterile products made by Aurobindo at a plant in Hyderabad.

The companies did not immediately reply to requests for comment from Reuters.

Many in India note that drugmakers globally, including in the United States and Europe, have also run afoul of increasingly stringent FDA inspection.

"When you are such a major player for the U.S. market, you will also have larger number of inspections," Ranbaxy CEO Arun Sawhney said in June.

(Additional reporting by Toni Clarke in WASHINGTON and Abhishek Vishnoi in MUMBAI; Editing by Jeremy Laurence)

By Tony Munroe and Sumeet Chatterjee