Shantanu Jindel
FDI Circular 2 of 2011 (“FDI Circular“) gives the consolidated FDI policy and is a single reference point for foreign investors. Presently 100% FDI is permitted under the automatic route in ‘industrial parks’. An industrial park has been defined as a project in which quality infrastructure in the form of plots of developed land or built up space or a combination with common facilities is developed and made available to all the allottee units for the purpose of industrial activity. The terms ‘industrial activity’ is defined to include basic and applied R&D on bio-technology and pharmaceutical sciences/life sciences. Pharmaceutical sector was specifically included in the FDI Circular given the urgent need to augment research and development infrastructure in this area and to expand the production facilities.
Government of India has reviewed the extant FDI policy in relation to pharmaceutical sector and has revised it vide Press note no. 3 of 2011 (“Press Note“). The Press Note stipulates the following changes:
a) FDI up to 100% under the automatic route would continue to be permitted under the pharmaceutical sector for green-field investments[1].
b) FDI up to 100% would be permitted for brownfield investments [2]in the pharmaceutical sector under the Government approval route.
A new paragraph 6.2.25 will be inserted in the FDI Circular to reflect the changes envisaged by the Press Note. Permitting 100% FDI in pharmaceutical sector will significantly increase the share of pharma MNCs in the Indian market and may have adverse effect on the availability of inexpensive healthcare. Brownfield projects (traditional mergers and acquisitions) may eventually undergo scrutiny from the Competition Commission of India and such fears may be allayed but it would be interesting to note the effect of the FDI policy of the generic drug industry. It has been a concern that once pharma MNCs have a strong presence in India they will lobby for stronger IP regime which will have adverse effect on the thriving generic drug industry and may lead to overall increase in the price of drugs. Presently the generic drugs are priced at a fraction of the price of their counterparts manufactured by pharma MNCs. For example, Novartis’ version of vital anti-cancer medicine Gleevec is priced at Rs. 1.3 lakh for a month’s dosage whereas the local generic versions cost Rs. 6,000 to Rs. 10,000 per month’s dosage.[3] If MNCs succeed in their battle against the generic drug industry and effects are observed uniformly on life-saving drugs, then government may have to rethink its strategy for permitting FDI in pharma sector.
While green-field investments will be a boon to the pharmaceutical sector in India, if they manage to provide the required impetus to the R&D and other infrastructure, brownfield investments need to be closely scrutinised and monitored by the Foreign Investment Promotion Board and Competition Commission of India for their effect on the sector.
[1] This is a form of direct investment where a parent company starts a new venture in a foreign country by constructing new facilities from scratch.
[2] This is a form of direct investment where a foreign company purchases/leases an already existing facility to launch its operations.
[3] Srinivasan S, Business Line, published on 13 October 2011.
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