Pharmaceutical area poses FDI conundrum in India

By Puja Sondhi and Ramanuj Gopalan, Amarchand Mangaldas
0
625

The pharmaceutical sector is one of the fastest growing sectors in India, with an estimated growth in production turnover from about ₹50 billion (US$925 million) in 1990 to over ₹1,000 billion in 2009-10. The domestic market accounts for around 60% of the turnover and exports for the remainder.

Globally, India is the third-largest producer of medicines by volume, according to figures in the National Pharmaceuticals Pricing Policy, 2012.

Policy change

In recent times, foreign multinational companies have acquired several well-known Indian pharmaceutical companies such as Ranbaxy Laboratories, Shanta Biotech, Matrix Lab, Orchid Chemicals and Piramal Healthcare. These acquisitions raised concerns about the affordability and availability of pharmaceutical products in India. In response, the Indian government amended the foreign direct investment (FDI) policy in relation to the pharmaceutical sector through a press note dated 8 November 2011, which continues in force.

Puja Sondhi
Puja Sondhi

Under the current policy for the pharmaceutical sector, FDI up to 100% is permitted for “brownfield investments” with prior government approval and FDI up to 100% is permitted for “greenfield investments” under the automatic route (without the requirement of prior government approval). Prior to the policy change, FDI up to 100% was permitted under the automatic route for all investments in the pharmaceutical sector.

The Foreign Investment Promotion Board (FIPB) is tasked with clearing FDI proposals in the pharmaceutical sector.

Legal ambiguity

While the 2011 press note denotes “brownfield investments” as simply “investment in existing companies”, it is silent on the definitions of “greenfield investments” and “pharmaceuticals”. Absence of clarity on these terms leads to ambiguity, as illustrated by the following situations:

(1) If FDI is proposed in a newly incorporated company to be followed by the transfer of existing Indian pharmaceutical business or assets (through a business transfer or asset purchase) to the new company, would such investment be considered as greenfield or brownfield investment?

(2) If FDI is proposed in a dormant pharmaceutical company, would such investment be considered as greenfield or brownfield investment?

(3) If FDI is proposed in a company that has assets like bio-molecules which are currently not used in drugs or pharmaceutical products but have the potential to be developed into pharmaceutical products, would the company be considered as engaged in pharmaceutical business?

Recommendations

As is evident from the above illustrations, regulatory clarity is required on the interpretation of the terms greenfield and brownfield investments and pharmaceuticals. To begin with, the government might consider providing clear definitions and guidelines in the FDI policy, which address among others, the scenarios described above.

Ramanuj Gopalan
Ramanuj Gopalan

Instead of basing a classification on whether a company is newly incorporated or already existing, the government might also consider criteria based on whether the company is engaged in commercial production of pharmaceutical products. It is recommended that companies in the research and development phase (which are not yet in production phase), in particular, be permitted to freely access FDI as they may require capital and know-how from foreign investors to bring their products to market.

In the medium to long term, the government could consider steps towards fully liberalizing this sector again. Towards this, it could reconsider setting certain control/investment thresholds that mandate approval for FDI in pharmaceutical manufacturing companies (instead of requiring approval for all existing companies).

The government might also consider permitting 100% FDI under the automatic route, subject to fulfilment of criteria specified in the FDI policy, similar to the approach followed for FDI in some other areas. In this regard, it is pertinent to note certain recent FDI proposals in the pharmaceutical sector that the FIPB has cleared with additional conditions including: (a) maintenance of a minimum level of essential drugs produced by the company for a defined period; and (b) minimum commitment of R&D expenses post investment.

Similar criteria could be specified in the FDI policy, and criteria could be stricter for companies supplying essential drugs. The National Pharmaceutical Pricing Policy recently brought into force by the government allows for essential drugs to come under price controls and provides for a safeguard to ensure affordable pricing of essential drugs in India.

The role of FDI in economic growth and development of a country is almost universally recognized. Clarity and liberalization are required in the FDI policy to ensure investment and technology flow in the pharmaceutical sector in India.

Puja Sondhi is a partner and Ramanuj Gopalan is a principal associate-designate 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.

Amarchand_Mangaldas_Logo

Amarchand Towers

216 Okhla Industrial Estate – Phase III

New Delhi – 110 020

Tel: +91 11 2692 0500

Fax: +91 11 2692 4900

Managing Partner: Shardul Shroff

Email: [email protected]