The pharma sector has gained renewed global attention due to the crisis brought about by COVID-19, a pandemic having an unprecedented impact on health and wellbeing of citizens across geographical boundaries. It is estimated that around 76 pharma companies across the world are in a race to develop and mass-produce an effective vaccine in the fight against COVID-19. Indian pharma companies too are playing a vital role in this search. The Indian pharmaceutical industry has responded to the rapid challenges arising from disruption in supply chains and is working in an integrated manner to drive local expertise by production and export of essential formulation to countries across the globe, and live up to its title as the ‘Pharmacy of the World’.
Over the years, India has been a prime source for manufacturing and supply of affordable and efficacious generic medicines across the world and there has been a steady flow of foreign direct investment (FDI) in this sector. M&A in Indian brownfield pharma continues to be an attractive proposition for foreign investors looking to enter India. With many global players deciding to move operations out of China, and India being a strong alternative contender, investment in the sector is likely to gain further momentum. India has a distinct advantage in this area and the Indian government is also pushing for reforms and rolling out the red carpet for businesses looking to invest in India. This also falls in line with the renewed desire to reduce domestic dependencies of Indian manufacturers on China for APIs. In order to cater to this objective, the Government of India has recently announced a package totalling INR 140 billion to set up bulk drugs and medical devices parks. Funds have been allocated herein for financing common infrastructure facilities and incentivising domestic production of bulk drugs/ APIs and medical devices, giving a further boost to pharma manufacturing in India and attracting further investments in the sector.
However, over the years, FDI in the domestic pharmaceutical sector has also been one of the most debated issues due to concerns raised over increasing FDI in brownfield projects (i.e. takeovers of Indian generic pharmaceutical companies by foreign players) and the consequences of such developments on production capacities, technology acquisitions, research and development and general public health and interest. These concerns are likely to receive further attention as investment in brownfield pharma projects may be the preferred route for foreign investors, especially if they are looking for quicker and cheaper alternatives to setting up a greenfield project. Brownfield investment saves the initial time and cost to start-up a project because vital infrastructure (such as production facility, capital equipment, local labour and local approvals, etc.) already exists.
India’s FDI policy for investment in the pharma sector has undergone significant changes in the last decade, steering the industry to the present scenario. Prior to 2011, 100% FDI was permitted for manufacture of drugs and pharmaceuticals under the automatic route (i.e. without requiring prior government approval), save for certain exceptions. In 2011, following a spate of takeovers of domestic pharma industries and sector concerns regarding availability of essential medicines, research and development and availability of technology, the FDI policy was revised to draw a distinction between FDI in greenfield and brownfield investment. Under this new regime, 100% FDI was allowed under the automatic route for greenfield investments to facilitate setting up of new manufacturing capacities, research and development and technology acquisition. For brownfield investments, 100% FDI was allowed under the approval route (i.e. with prior government approval). In 2014, amidst speculations of banning FDI in brownfield pharma, the FDI policy was revised to add a further condition that a non-compete clause in inter-se agreements would only be allowed in special circumstances with government approval. This condition is applicable to both brownfield and greenfield investments. Further, in 2016, Government of India, in its endeavour to attract foreign investment in the sector, relaxed the FDI Policy for brownfield pharmaceutical. Press Note No. 5 (2016 Series) dated June 24, 2016 (2016 Press Note), permitted FDI up to 74% under the automatic route into brownfield pharmaceutical, contrary to the earlier requirement to seek government approval for such investment. However, investments above 74% continued to be under the approval route. At the same time, FDI up to 100% under the automatic route also continued to be permitted for greenfield investments. Moreover, the 2016 Press Note imposed certain conditions for FDI in brownfield pharmaceuticals, under both automatic and government approval routes, such as, maintaining the production level of essential medicines, consumables and their supply to the domestic market at the time of induction of FDI, maintaining R&D expenses in value and furnishing complete information relating to transfer of any technology. The Review 2011-13 published by the Foreign Investment Promotion Board (FIPB) had initially set out the aforesaid conditions, which were being imposed by FIPB, while recommending brownfield investments in the pharma industry. This revised position introduced in 2016 continues to apply to date for any FDI in brownfield pharma. The current FDI policy attempts to strike a balance between the genuine need of industry members to seek out funding on one hand, whilst ensuring that domestic requirements are not hampered in any way.
The Way Forward
The main objective behind relaxing the approval requirement for FDI in brownfield pharmaceutical entity in 2016 was to promote the development of the sector by liberalising the FDI regime to attract foreign investment. However, a case may be set up that if takeovers by large global companies are likely to promote and develop the industry, then why is the automatic route for investment in brownfield pharmaceutical restricted to 74% and not opened up to 100% under the automatic route? This is of course notwithstanding the need to ensure adequate domestic supply at affordable prices.
Price hike, change in product mix (i.e. from cheap generics to more expensive branded medicines), availability of affordable drugs and impact on competition have been major concerns against FDI in domestic pharma companies by foreign players. However, it is important to note that the government has introduced several protectionist measures to counteract the adverse impact of infusion of more foreign investment in the domestic pharma market and public health. For instance, it has put in place a regulatory mechanism to ensure production and availability of minimum level of essential medicines and their supply to the domestic market for a period of five years at an absolute quantitative level. The government has also, via National Pharmaceutical Pricing Policy, 2012, introduced policy measures for pricing of drugs to ensure availability of essential drugs at affordable prices. The current FDI policy also provides for maintaining a minimum level of research and development expenses (in value) for a period of five years at an absolute quantitative level at the time of induction of foreign investment. The restriction on the use of non-compete clauses in inter se agreements except under special circumstances with government approval (discussed hereinabove) allows Indian promoters to compete with the foreign players and encourage free competition in the domestic pharmaceutical market.
The idea behind promoting the infusion of more foreign investment into the pharma industry is to ensure greater research, accessibility of affordable medicines and more competition. Besides, greater influx of FDI into the Indian pharma industry will provide a major impetus to manufacturing capacities, introduction of new technologies and employment generation. Therefore, one would argue that the government should consider permitting FDI up to 100% under the automatic route in brownfield pharma. A trade off to be considered could be additional protections for domestic demand. Technology transfer provisions may be tweaked accordingly. At present, there is no compulsion on transfer of technology from the foreign investor, which hinders the development of technological capabilities of local pharma companies. Furthermore, the government may consider incorporating higher benchmark levels for the existing conditions of maintaining minimum production levels of essential medicines and research and development expenses. Recently, the Government of India has reviewed and amended the extant FDI policy for curbing opportunistic takeovers/ acquisitions of Indian companies due to the current COVID-19 pandemic. As per the revised policy, entities of the countries sharing land border with India or where the beneficial owner of an investment into India is situated in or is a citizen of any such country, can invest only under the government route.
A balanced policy in this regard would provide sufficient opportunities for innovation and competition, to support the growth of the domestic pharma industry as well as ensuring availability of essential medicines at affordable prices.
Despite India having undergone a remarkable transformation with respect to its FDI policies in the pharma sector, one cannot, given existing global conditions, rule out a renewed focus on India as a legitimate alternative to China. There is an increased focus on attracting FDI in the sector and providing a faster entry route for investors looking to move their pharma manufacturing to India. We have already seen the government taking baby steps on this front, whereby it is examining ways to shore up foreign investment, including a fast-track mechanism to clear applications for investments. As part of this exercise, the Department for Promotion of Industry and Internal Trade is studying different global models of pharmaceutical FDI and plans to examine the entire FDI model, especially ways to boost investment in the pharmaceuticals sector and how it can be treated separately.
 Serum Institute of India, one of the largest vaccine makers of the world, is leading efforts by collaborating with Oxford University as one of the seven global institutions manufacturing the COVID-19 vaccine developed by the latter.
 Press Release dated March 21, 2020, Cabinet approves Promotion of domestic manufacturing of critical Key Starting Materials/Drug Intermediates and Active Pharmaceutical Ingredients in the country, Union Cabinet, Government of India. Can be accessed at: https://pib.gov.in/PressReleasePage.aspx?PRID=1607483.
 Press Release dated March 21, 2020, Cabinet approves promotion of the Domestic Manufacturing of Medical Devices in country, Union Cabinet, Government of India. Can be accessed at: https://pib.gov.in/Pressreleaseshare.aspx?PRID=1607485.
 Government approval was required for FDI in the manufacture of licensable drugs, pharmaceuticals and bulk drugs produced by recombinant DNA technology and specified cell/ tissue targeted formulations.
 Press Note No. 4 (2001 Series) dated May 21, 2001. Can be accessed at: https://dipp.gov.in/sites/default/files/press4_01.pdf.
 Press Note No. 3 (2011 Series) dated November 8, 2011. Can be accessed at: https://dipp.gov.in/sites/default/files/pn3_2011_1.pdf.
 Press Note No. 1 (2014 Series) dated January 8, 2014. Can be accessed at: https://dipp.gov.in/sites/default/files/pn1_2014_0.pdf.
 Foreign Investment Promotion Board Review 2011-2013, FIPB Secretariat, Department of Economic Affairs, Ministry of Finance, Government of India. Can be accessed at: http://www.fipb.gov.in/Forms/FIPBREVIEW2011-13.pdf.
 Consolidated FDI Policy, 2017, Department of Industrial Policy and Promotion, Ministry of Commerce and Industry, Government of India. Can be accessed at: https://dipp.gov.in/sites/default/files/CFPC_2017_FINAL_RELEASED_28.8.17_1.pdf.
 Press Note No. 3 (2020 Series) dated April 17, 2020. Can be accessed at: https://dipp.gov.in/sites/default/files/pn3_2020.pdf.
 Any subsequent change in beneficial ownership on account of transfer of ownership of any existing/ future FDI in an Indian entity (directly or indirectly), resulting in beneficial ownership falling in a restricted country, will also require government approval.