FDI in brownfield pharma stays, more power to FIPB

Jan 09 2014, 01:16 IST
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FDI up to 100 pct is allowed in new (greenfield) ventures through the automatic route. FDI up to 100 pct is allowed in new (greenfield) ventures through the automatic route.
Summary100% FDI helps, removing non-compete clause will hit M&A.

Despite the department of industrial policy and promotion (DIPP) pitching for curbs on FDI in existing pharmaceutical units, the government on Wednesday announced continuation of the policy of allowing 100% FDI in the brownfield space, subject to approval from the Foreign Investment Promotion Board (FIPB).

A press note issued by the DIPP following an earlier Cabinet decision, however, said the non-compete clause would not apply for mergers and acquisitions involving FDI in the pharmaceutical space, except in cases where the FIPB feels it is needed.

Analysts said the discretion given to the FIPB to vet the proposals and decide whether to invoke the non-compete clause could reduce potential FDI flows into the sector, which has seen a flurry of acquisitions of Indian units by foreign drug-makers in recent years.

FDI up to 100% is allowed in new (greenfield) ventures through the automatic route.

The DIPP had contended that FDI limit in companies making “critical” segments like oncology and vaccines be brought down to 49% through the approval route. It also wanted to enforce compulsory capacity creation by the foreign investor. Other riders recommended by DIPP included not allowing foreign investors to divest their manufacturing and R&D facilities in case of ownership transfer, and forcing them to put at least 25% of their total investment in research. The DIPP had also argued that acquisition of Indian pharma companies would lead to a paucity of essential medicines and a price spiral. This was refuted by analysts citing sufficient competition in the segment and alternative therapies available at low cost.

With the PMO, the finance ministry and Planning Commission voting against such a policy overhaul at a time when the country was liberalising foreign investment in various sectors and needed copious capital inflows, the DIPP’s views fell flat. The DIPP, however, could get the non-compete clause removed, contending that if a promoter sells one facility, he should not be barred from using all his knowledge and expertise to start a similar venture.

While the pharma industry is relieved by the government’s stand to continue with the policy, it is “worried” about the “conditional scrapping” of the non-compete clause.

The domestic industry fears that removing this clause would reduce its negotiating powers to get a high valuation, while foreign players are concerned that they (as buyers) would not be able to limit competition. Under a non-compete clause, existing promoters who sell out cannot

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