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Thursday, 09 January 2014 00:00
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Pharma FDI policy gives even more discretion to FIPB

Though the Department of Industrial Policy & Promotion (DIPP) lobbied hard, both during and after the Mylan purchase of Agila Specialties for $1.8 billion, to restrict the buyouts of Indian pharmaceuticals units by foreign firms, the government has done well to stick to the status quo. Which is that foreign firms require no permission to invest up to 100% in setting up greenfield pharmaceutical units in the country, but they need the approval of the Foreign Investment Promotion Board (FIPB) if they are to buy existing units (brownfield pharma). While foreign firms can currently buy up to 100% of brownfield pharma units subject to FIPB approval, DIPP wanted to cap this at 49%—it also wanted lock-in clauses before such firms could be re-sold and wanted to fix the proportion that had to be invested in research activities.

While DIPP had given data on how many Indian manufacturers had been bought over by foreign firms and the resulting hike in royalty and other payments, this didn’t cut much ice with other ministries such as the finance one. For the very simple reason that, with many manufacturers making most drugs in India, there is no evidence of prices having risen after MNCs took over domestic firms; indeed, there is no evidence that the production of drugs has fallen after a takeover. As for the increased imports that DIPP spoke of, or the increased royalty/dividend payouts, they were not significant. So while DIPP had said the forex outgo for 7 firms was R9,500 crore over 7 years, this was seen as minuscule compared to the R80,000 crore of pharma exports in FY13 alone.

While not putting a 49% cap on FDI in brownfield pharma will help keep the India sentiment positive—pharma is the 7th largest sector of FDI inflows and R49,000 crore have come in since 2000—the caveat agreed to will be a dampener. Since one of the reasons for buying over a firm is exclusivity, many firms like to build in a non-compete clause—if, after selling Agila Specialties to Mylan for $1.8 billion, Strides Arcolab was to set up another unit to produce the same injectables, Mylan would feel cheated. Under what has been agreed to now, the non-compete clause is not to be allowed except under ‘special circumstances’ with the approval of the FIPB. In which case, Indian pharma firms will fetch less when they are sold to foreigners; and there will be a premium in being able to swing a non-compete permission, neither of which can be good news. Presumably, the decision to not allow the non-compete clause was to ensure that India does not lose out when firms are sold to foreigners—that is, having sold the company to a foreigner, the Indian promoter can go back to replicating the business immediately. But if this was the fear, why not go for the 49% cap the DIPP wanted? What has been agreed to is the classic half-way house, a neither here nor there policy that gives even more discretion to the politico-bureaucratic class.


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