FDI in Pharmaceutical

Sector: Past, Present

and Future Rabindra Jhunjhunwala
Partner
Sameer Sah
Senior Associate

INTRODUCTION appears that this Committee assessed the various

pros and cons and provided the following
essential recommendations:
Drugs and pharmaceuticals form part of the basic
necessities of the public at large. For this precise
(a) There should be no blanket ban on FDI in the
reason, India treats drugs and medicines as
pharmaceutical sector;
“Essential Commodities” and regulates their
production and supply along with other essential
(b) The Competition Commission of India (CCI)
commodities, such as sugar. In India, around the
should be involved to scrutinise all
early 1970s, the bulk of the drugs production was
transactions in this sector; and
done by Indian arms of multinational companies.
With the gradual tightening of exchange control
(c) As an interim measure, and in order to allow
norms and restrictions on foreign direct
the CCI to equip itself, the Foreign
investment (FDI) generally, the dominance of
Investment Promotion Board (FIPB) should
Indian generic drugs manufacturers grew. They
scrutinise all such proposals for 6 (six)
were also aided by the Indian patent regime
months.
which did not recognise product patents until
2005, and allowed generics’ manufacturers to
The Government accepted these
flourish. Eventually, bowing to its TRIPS’
recommendations and introduced changes in the
obligations, India amended its patent laws to
FDI policy in November 2011 whereby “brownfield
recognise product patents.
investments (i.e. [sic] investments in existing
companies)” would require prior approval from
With changes in Indian foreign investment laws
the FIPB.1 The Consolidated FDI Policy was
since the decade of the 90s, and with the
amended to clarify that FDI in “Existing
eventual liberalization of FDI in the
Companies” in the pharmaceutical sector would
pharmaceutical sector in the year 2000,
fall under the Government route. The revisions
multinational companies gradually increased
also specified that the policy would be reviewed
acquisition activity in India. India was recognised
after a period of 6 (six) months.2
as a cost effective jurisdiction to manufacture
drugs and pharmaceuticals that were compliant
with EU and US export requirements, and also to LOGJAM OF PROPOSALS AND
service the Indian pharmaceutical market. CONDITIONS PERTAINING TO
This flurry of activity caused concerns in the “ESSENTIAL MEDICINES”
Government regarding production and pricing of
drugs and since 2011, there have been restrictions Phase 1: The first approvals in this matter were
on FDI in this space. This article traces the issued by the FIPB starting from its meeting in
changes in this policy. the January 2012. Between January 2012 and May
2012, the FIPB cleared 13 proposals for FDI in the
pharmaceutical sector. However, thereafter,
ARUN MAIRA COMMITTEE
investment proposals were deferred as the 6 (six)
REPORT, 2011 AND THE months’ period mentioned in the earlier press
NOVEMBER 2011 POLICY note had expired. Between then and August 2012,
only a couple of proposals dealing with past
CHANGES
1
The Arun Maira Committee was constituted to Press Release by Ministry of Commerce and Industry
dated 10 October 2011
assess any necessary measures to be taken in 2
Press Note No 3 (2011 Series) issued by the Department
relation to the flurry of FDI transactions in the
of Industrial Policy and Promotion dated 8 November
pharmaceutical sector. Based on press reports, it 2011.

KHAITAN & CO | ERGO PERSPECTIVE 1

 activities and a public offer were approved. Prime Minister confirmed that the FIPB would
Various discussions were held at different levels continue processing applications received by it.7
of the Government and eventually, in July 2012, Since then, once again the FIPB has been clearing
there were press reports regarding an inter- investment proposals in this sector.
ministerial group having finalised guidelines for
FDI in the pharmaceutical sector. The guidelines PARLIAMENTARY STANDING
were supposed to apply only to investments
above 49% and were apparently supposed to not COMMITTEE ON COMMERCE
apply to FDI in subsidiaries.3 REPORT
Phase 2: From August 2012, the FIPB again The Parliamentary Standing Committee on
started clearing proposals. There were certain Commerce headed by Mr Shanta Kumar, M.P.,
conditions that were introduced and imposed. undertook the task of assessing the concerns
These dealt with medicines that had been notified around FDI in the pharmaceutical sector in May
as a part of the National List of Essential 2011 and it invited comments from the public in
Medicines, 2011. These were: October 2011.8 Based on the comments received
from the public, the report of the committee was
(i) The highest annual production of essential finally presented to the Rajya Sabha and tabled
medicines during the last 3 (three) years before the Lok Sabha on 13 August 2013. While
would be maintained for the next 5 (five) the report notes “that foreign investments per se
years; are not bad”, it makes fairly scathing remarks
pertaining to the current experience of FDI in this
(ii) The highest research & development sector, and the Government involvement and
expenses incurred by the Indian company controls in this sector. A brief gist of the report is
during the last 3 (three) years would be as follows:
maintained for the next 5 (five) years; and
(a) The Committee noted that there has been a
(iii) Details of any transfer of technology would gradual shift in trend from the 1970s when
be provided to the Government. the Indian pharmaceutical market was largely
controlled by MNCs and India imported a
Based on these three conditions, the FIPB started substantial chunk of its medicines’
clearing proposals again after scrutiny. requirements, to the current position where
Indian generics’ manufacturers dominate the
Phase 3: However, there was a further lack of market and an overwhelming majority of the
clarity in terms of policy around November / Indian drugs’ and medicines’ requirement is
December 2012, but reportedly, a decision was satisfied through indigenous production. In
taken by the Government to permit the FIPB to fact, the report notes how the Indian
continue scrutinizing pharma investment pharmaceutical sector is now effectively a
proposals.4 In the meantime, the FDI Policy was “net exporter” as opposed to a “net
revised in April 2013, and the policy replaced the importer”;
words “Existing Companies” with the word
“Brownfield”, and the policy expressly clarified (b) The Committee noted that the substantial
that the Government could impose conditions majority of FDI in pharma is in brownfield
while clearing proposals.5 projects and not in greenfield projects. Also,
the Committee criticised the Government for
Phase 4: Around July 2013, the DIPP starting not having any definite mechanism in place
raising concerns regarding the processing of to track whether investment proposals were
investment proposals and various investment for greenfield or brownfield projects;
proposals involving transfer of control were
deferred again.6 Once again in August 2013, the (c) The Committee noted the likelihood of MNCs
replacing cheaper generic products with
costly branded/patented products. It also
3
“Govt takes call on FDI in pharma”, the Mint, 25 July 2012; noted that possibility of Indian generics
“Government may ease FDI norms in pharmaceutical companies getting swayed by strategies of
industry”, the Economic Times, 25 July 2012
4
“FIPB retains right to clear FDI in pharma”, the Indian
Express, 4 December 2012. 7
“FDI in Pharma: PM vetoes DIPP, clears decks for Mylan's
5
Consolidated FDI Policy, Circular No 1 of 2013, issued by $1.6 bn takeover of Agila Specialties”, the Economic
the DIPP, dated 10 April 2013. Times, 17 August 2013
6 8
“FIPB may defer FDI proposals in pharma sector”, The Press Release from Ministry of Commerce and Industry
Business Standard, 4 July 2013 dated 18 October 2011

KHAITAN & CO | ERGO PERSPECTIVE 2

 MNC parents. It gave an example of an NEXT STEPS AND FUTURE
existing acquisition that resulting in the
Indian company withdrawing oppositions and OUTLOOK
challenges to a patented drug in other
countries. The policy on FDI in this sector has been under
constant flux and has been stuck in constant
(d) The Committee also noted how the “stop-and-go” traffic. It appears that various
acquisition of generics manufacturers could Government departments have divergent views
stifle the bid by these manufacturers to on whether to permit such investments or not.
increase their search for generic versions of However, looking at the past trends, the following
MNCs drugs, and this could work against can be anticipated for the sector:
India’s interests.
(a) Given the constant flux in the sector, it would
(e) The FIPB’s involvement is not sufficient and be advisable to be conservative in
the CCI should play a more active role in approaching decisions pertaining on whether
scrutinizing such proposals. such transactions require the Government
scanner or not. Further, with general
Based on these (and other similar operational elections around the corner, one can only
comments), the Committee has opined that “the expect more flux in this policy.
Government must impose a blanket ban on any
FDI in brown field pharma projects”. The Prime (b) For transactions that will be applying for
Minister is learnt to have vetoed this report, 9 and approval, parties must build in a sufficient
has come under criticism from opposition parties lead time for applying for and obtaining
for this decision.10 approval for the transaction.

The DIPP is also reported to have circulated an (c) Parties contemplating such transactions
internal note within the Government to restrict should assess the criticality of the products
FDI in critical sectors at 49%, and to also consider involved, and whether they fall within the
imposing additional conditions regarding increase National List of Essential Medicines, 2011 and
in capacity and employment.11 the Drug (Price Control) Order, 2013.

(d) It is likely that eventually, the CCI may be

KINDS OF APPROVALS
empowered to address these issues. This will
of course require appropriate amendments to
Various categories of transactions appear to have
the Competition Act, 2002, and it is likely
been submitted to the FIPB for approval. These
that certain minimum thresholds may be
include transactions involving plain vanilla FDI
prescribed for a transaction to fall within the
(by way of a fresh infusion of funds, or by way of
ambit of the CCI’s review.
a purchase of existing shares), offers for sale
through public issues, issuances of Foreign
Despite this see-saw, the pharmaceutical sector is
Currency Convertible Bonds, transfers of shares
seeing a fair amount of activity. Some of the
by way of share swaps, and court sanctioned
larger deals in the recent past that have been
mergers between Indian companies leading to
reported are Mylan-Agila and Mylan-Strides,
issuance of shares to foreign shareholders.
Claris-Otsuka-Mitsui, and Hospira-Orchid. We
have ourselves been involved in the latter 2 (two)
deals, representing the foreign investors.

Rabindra is a Partner in the Corporate / M&A

team at Khaitan & Co

Sameer is a Senior Associate in the Corporate /

M&A team at Khaitan & Co
9
“FDI in Pharma: PM vetoes DIPP, clears decks for Mylan's
$1.6 bn takeover of Agila Specialties”, The Economic
Times, 17 August 2013
10
“BJP slams decision on FDI in pharma sector”, The
Deccan Herald, 23 August 2013
11
“Science & Tech Ministry for curbs on FDI in pharma”,
The Business Line, 27 September 2013; “FDI in pharma:
DIPP to circulate draft cabinet note this week”, The
Economic Times, 20 August 2013; “Draft note on FDI in
pharma likely soon”, The Stateman, 21 August 2013

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