Cabinet may decide to reduce FDI in pharma to 49 percent

The Cabinet is expected to take a decision on relaxing FDI norms for the housing sector and reducing the foreign direct investment cap to 49 percent in critical areas of the pharma segment tomorrow.

Several departments including the DIPP have raised serious concerns over the continuous acquisitions of Indian drug makers by global multinational firms.

“The Cabinet will review the FDI policy in pharmaceutical and housing tomorrow,” an official said.

The Department of Industrial Policy and Promotion (DIPP) has proposed to reduce the FDI cap from 100 percent to 49 percent in the “rare or critical pharma verticals”.

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According to sources, three categories have been proposed to define “rare or critical”. It includes companies with five or more manufacturing units, and companies with 40 percent or higher market share irrespective of the total number of manufacturing facilities.

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“If an entity manufactures multiple products, it will be treated as critical if either of the above two conditions are satisfied for at least one third of the products,” said a source.

The DIPP has also proposed the incorporation of conditions for foreign firms like mandatory investment in R&D and a non-compete clause in the shareholders pact.

The sources also said the foreign company would not be allowed to close down the existing R&D centre and would have to mandatorily invest up to 25 percent of the FDI in the new unit or R&D facility. The total investment, as per the proposal, will have to be incurred within 3 years of the acquisition.

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There is thinking in the government that with MNCs taking control of Indian firms, there could be reduction in the supply of vaccines and injectables, particularly for cancer and active pharmaceutical ingredients.

“MNCs which are acquiring domestic firms have spent less than one percent of their total sales in R&D in India. They are doing only clinical trials in India and not actual drug development work,” the source said.

In 2008, Japanese firm Daiichi Sankyo had bought out the country’s largest drug maker Ranbaxy for $4.6 billion.

US-based Abbot Laboratories had acquired Piramal Healthcare’s domestic business for $3.7 billion.

Currently, India permits 100 percent FDI in the pharma sector through an automatic approval route for new projects, but the foreign investment in existing pharma companies are allowed only via FIPB approval.

Regarding FDI in the housing sector, the DIPP has proposed the relaxation of FDI norms including easing conditions for exit before the three-year lock-in period. It has proposed easing conditions for exit of foreign players before the three-year lock-in period. .

The proposal includes change in the current requirement of having a minimum built-up area of 50,000 sq mt to 20,000 sq mt of carpet area for FDI in construction projects.

That apart, the Cabinet note has suggested a uniform minimum capitalisation of $5 million for both wholly-owned subsidiaries (WOS) and joint ventures with Indian parters. At present, the capitalisation requirement for WOS is USD 10 million.

On exit of FDI before the three-year lock-in period, the note has suggested more relaxations.

They can exit “on receipt of occupancy and or completion certificate issued by the competent local authority or by way of sale to another non-resident investor subject to a lock-in period of three years from the date of the purchase by the other foreign investor”, a source said.

However, the transfer from foreigner to another will be permissible only once, with no possibility of waiver of the fresh lock-in period.

Between April 2000 and June 2013, construction development, including townships, housing and built-up infrastructure, in the country received FDI worth $22.24 billion or 11 per cent of the total FDI attracted by India during the period.

Press Note 2 (2005) of the DIPP allows FDI up to 100 per cent in townships with conditions.

The DIPP, which deals with FDI related matters, issues provisions in the form of Press Notes or consolidated circulars.

PTI