Column: Need to look beyond non-compete clause

Jan 16 2014, 02:55 IST
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SummaryThe government should bring in clarity in identifying brownfield and greenfield investments

The Department of Industrial Policy and Promotion, Ministry of Commerce and Industry has recently announced that the existing foreign direct investment (FDI) policy in the pharma sector will remain unchanged, except with a condition that that the non-compete clause will be permitted only as an exception, with prior approval of the Foreign Investment Promotion Board (FIPB).

The decision will, hopefully, keep the spirits of the foreign investors intact while protecting the interest of domestic players. The decision to maintain the status quo on FDI caps will send a message to the international investor community that India has stable FDI policies—after all, a perception of an unstable policy environment will affect the decision of any investor in committing large funds.

Whether the protection provided to the domestic pharma manufacturing companies will be as effective as anticipated or not will be clear only after the implementation of the policy. However, it is important to understand the broad contours of the non-compete clause and its implications, especially for the pharma sector.

As the nomenclature suggests, a ‘non-compete’ clause in an investment agreement restricts either party in a JV or the acquired entity in an acquisition from engaging in a similar business for a mutually-agreed period which, as per market standards, could range between three to seven years, depending upon the profitability of the entity or other business requirements. As a thumb rule, any non-compete clause is narrowly drafted as it is designed to further a legitimate business justification, such as to ensure that the acquirer is able to put the assets purchased to their productive use.

There is no doubt that the non-compete clause provides reasonable protection to any investor against arbitrary competition from its own JV partner or from the promoter who has recently exited the business and has the know-how after selling it to the investor at a fair market value. However, it may not be so important for the pharma industry which is primarily driven by the ownership of patents and other intellectual property rights (IPRs).

In case of a brownfield investment, the Indian promoter/sellers will automatically extinguish their rights in any patent or other IPRs by selling their stake in the Indian drug manufacturing company or the drug business itself. The non-availability of the non-compete clause will only permit the Indian promoter to start a new venture for manufacturing generic drugs, which may not

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