Investment policy rethink needed for pharma sector

By Akila Agrawal and Sourav Kanti De Biswas, Amarchand Mangaldas
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Foreign investments in the pharmaceutical sector are being heavily scrutinized by the Foreign Investment Promotion Board (FIPB). Until 2011, foreign investment in this sector was permitted up to 100% under the automatic route. In 2011, the government amended its policy such that investments in green-field pharma enterprises are permitted up to 100% under the automatic route and investments in brown-field pharma enterprises require prior approval.

The amendment was triggered by public policy concerns. The government thought that the acquisition of several Indian pharma companies by foreign entities could impact production levels and prices of essential drugs.

Akila Agrawal
Akila Agrawal

Viable alternative?

Despite the laudable objectives behind the policy change, it is useful to examine whether the twin objectives of availability and affordability of essential medicines could be met through existing regulations, without hindering genuine inflows of foreign direct investment (FDI).

Through the Drugs (Prices Control) Order, 2013, issued by the National Pharmaceutical Pricing Authority, the government will be able to regulate prices of essential medicines and has the right to require drug manufacturers to increase production or undertake sales to specific persons in case of emergencies. It may be practical to stringently apply and make effective these regulations rather than to require approval for all brown-field foreign investments, particularly because the above objectives are applicable irrespective of whether an entity is foreign owned or Indian owned and therefore introducing this provision in the FDI policy seems irrational.

Concerns about research and development expenditure commitments and ensuring continuity of production of essential medicines in cases of brown-field investments can always be separately addressed by imposing conditions under the FDI policy, without the need for the FIPB to individually scrutinize each transaction.

Broad definition

The term “brown field” is not explicitly defined in the FDI policy. The notification in 2011 referred to brown-field investments as investments in existing companies. This appears to be the prevailing interpretation of this phrase.

Today, if a 100% foreign-owned pharma company wants to issue further shares to its parent entity to meet working capital requirements, it will have to receive prior approval of the FIPB. Similarly, if such a pharma company makes a rights offer, it will require FIPB approval. Transfer of shares between two non-residents will require FIPB approval even in the case of an internal group restructuring.

The government should create exceptions from the approval requirements for such cases as they merely add to the delay in bringing investments into India and make doing business in India cumbersome rather than effectively address any public policy concerns.

The industry also has concerns over medical devices being classified under the pharma sector and thereby facing the same stiff norms applicable to brown-field investments in pharma companies. In our view, while the manufacture of medical equipment that is classified as “drugs” under the Drugs and Cosmetics Act, 1940, may fall under the pharma sector currently, it is debatable whether a company that manufactures medical devices where a small or negligible percentage are classified as drugs under the act will fall under the pharma sector or the manufacturing sector.

What’s next?

As per news reports, the government is deliberating on creating a sub-category for medical equipment under the pharma sector which will not attract the stiff FDI conditions as applicable to brown-field investments in the pharma sector. The new Drugs and Cosmetics Bill, 2013, also proposes to bring about a clear distinction between drugs and medical equipment. Early clarification of this matter would be helpful.

Sourav Kanti De Biswas
Sourav Kanti De Biswas

In a 2011 meeting chaired by the prime minister it was decided that the FIPB would scrutinize pharma proposals for a short term and subsequently the Competition Commission of India (CCI) would be empowered to decide all cases of mergers and acquisitions in this sector irrespective of any threshold. This decision has not yet been implemented.

Given that one of the key concerns in this sector relates to indiscriminate acquisition of home-grown Indian companies by foreign multinational entities, it is fitting for the CCI to be granted the authority to scrutinize transactions that are above a certain threshold.

In light of the objectives that the government has set out to achieve through the foreign investment policy in the pharma sector, the existence of regulations that can control availability and price of essential drugs, and the cumbersomeness of the existing FDI regime in genuine investment cases, the government should reconsider whether it is necessary for the FIPB to review each individual foreign investment transaction in the pharma sector.

Akila Agrawal is a partner and Sourav Kanti De Biswas is a principal associate at Amarchand & Mangaldas & Suresh A Shroff and Co, New Delhi. The views expressed in this article are those of the authors and do not reflect the position of the firm.

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