Sector-Specific Conditions on FDI for Pharmaceuticals

Foreign direct investment (FDI) is an investment by a company or an individual in a country into business interests located in another country. Foreign direct investment is an important engine of economic growth. Foreign Direct Investment (FDI) in India has been steadily declining. It is the second time since 2014, a sustained decline has been reported in 2019-20. It was Rs. 9994 crores in 2014-15 and fell to Rs. 2496 crore in 2019-2020 as reported by the Ministry of Medicines. FDI up to 100% in the pharmaceutical sector is allowed through the automatic route for Greenfield investments and up to 74% for Brownfield investments. Over 74% of FDI in the pharmaceutical sector for Brownfield investment is permissible through government approval. In this article, we will discuss the sector-specific conditions for Foreign Direct Investment (FDI) for Pharmaceuticals.

FDI Policy in India

Over the years, India has been the hub for the production and supply of affordable generic drugs across the globe, hence the pharmaceutical sector has been experiencing a steady influx of foreign direct investment (FDI). India accounts for 20% of global supply by volume and also supplies 62% of global vaccine demand. Globally, it ranks 3rd in terms of production volume and 10th in terms of value, accounting for approximately 10% of world production in terms of volume and 1.5% in terms of value. The country is home to more than 3,000 pharmaceutical companies with a strong network of more than 10,500 manufacturing plants. The turnover of the domestic pharmaceutical market reached USD 20.03 billion in 2019, up 9.3% from 2018, growing with increasing penetration of health insurance and pharmacies.

And due to the crisis caused by the Covid-19 pandemic, the pharmaceutical sector has gained much global attention, with many global players choosing to move their operations out of China, and therefore India, with its growing market and economic staff, offers to be a strong alternative contender. The Indian government is also pushing for reforms for businesses looking to invest in India.

What is Greenfield FDI in Pharma?

Greenfield investments are investments in new plants. Greenfield investments are investments where a foreign investor invests from scratch in the construction of new production and operating facilities and also requires the use of industrial licenses, etc.

What is Brownfield FDI in Pharma?

A Brownfield investment refers to an investment in an existing plant. Brownfield investments are usually made through mergers and acquisitions. Brownfield investment is preferred over Greenfield investment because it saves the initial time and cost of starting a project. After all the basic infrastructure (such as production equipment, capital equipment, local labor, and local approvals, etc.) already exists and is a relatively faster and cheaper Greenfield project alternative.

Why invest in the pharmaceutical sector?

The Indian pharmaceutical sector provides several benefits to its investors. Some of them are listed below:-

• Cost-effectiveness: India is a cost-effective manufacturing hub for pharmaceutical institutes. Pharmaceutical companies in India have the primary advantage of low manufacturing costs, which provides an incentive for lower R&D costs, making it one of the best investment opportunities. The availability of a large amount of scientific know-how acts as another feature in its favor.

• Economic drivers: India has witnessed a surge in its economic growth due to the advent of the pandemic scenario of COVID-19, where Indian pharmaceutical companies have played a major role in providing vaccines against COVID-19 worldwide due to their advanced capacity to mass produce vaccines at a lower cost. This proved to be a catalyst for the improvement of the Indian economy, which further led to an increase in the purchasing power of the masses to invest in health insurance.

• Policy support: The government of India supports the Indian pharmaceutical players by announcing effective policies from time to time. Pharma Vision 2020 aims to make India a global leader in comprehensive drug discovery and development along with mass production of low-cost generic drugs. The Government of India has also shown an inclination to grow the Indian pharmaceutical sector by introducing effective laws on foreign investment in the pharmaceutical sector.

Changes in Foreign Direct Investment policy in the pharmaceutical sector

Foreign direct investment in the pharmaceutical sector has undergone many significant changes in the last decade. Before 2011, 100% FDI was allowed in the manufacture of drugs and pharmaceutical goods automatically. Currently, foreign direct investment policy is diversified between Greenfield and Brownfield investments. Greenfield investments are those investments where foreign investors invest in the introduction of new products that are equipped from the basic level. Foreign direct investment under this regime is allowed through a 100% automatic route where no government approval is required. While investments in Brownfields refer to investments that are made in already established pharmaceutical entities. This investment generally takes the form of mergers and acquisitions. FDI under this regime is allowed up to 74% under the automatic route. However, investments above 74% are subject to an approval route where government approval is required.

Conditions required for investing in the Indian pharmaceutical sector

Both investment aspects are subject to certain conditions as described below:

Conditions for Greenfield and Brownfield investments:

• A non-compete clause will not be allowed in both investments except in special circumstances with the approval of the Government.
• The potential investor and the investee must submit a certificate in the prescribed form for foreign investment together with the application.

Conditions applicable to Brownfield investments:

• Maintenance of research and development: These expenditures should be maintained for 5 years at an absolute quantitative level. The benchmark for this level would be set to the highest level of R&D expenditure incurred in any of the three financial years immediately preceding the FDI induction year.

• Maintaining the production and supply of the National List of Essential Medicines (“NLEM”): The level of production and supply of NLEM drugs should be maintained during the next 5 years at an absolute quantitative level. The benchmark for this level would be set to the level of production of drugs and/or consumables by NLEM in the three financial years immediately preceding the year of FDI induction. Of these, the highest level of production in any of the three years would be considered as the level.

• Information for the Administrative Ministry: In case there is a transfer of technology, information will be provided to the administrative ministry along with bringing foreign investment into the investee company.

• Monitoring of the Administrative Ministry: Compliance with the above conditions will be monitored by the Administering Department of the Ministry of Health and Welfare, the Ministry of Medicines, or any other regulatory authority as notified by the Central Government from time to time.

• Consolidated foreign direct investment policy 2020: Further, under the FDI Policy 2020, the government has automatically allowed 100% FDI in medical device manufacturing, which includes but is not limited to instruments, devices, implants, or even software that could help medical professionals treat/diagnose any disease or disorder. The above conditions will therefore not apply to Greenfield and Brownfield projects in this sector.

Final words

India’s foreign direct investment policy for investment in the pharmaceutical sector has undergone significant changes in the last decade. And now due to the Covid-19 crisis, the pharmaceutical sector is at the center of hot global attention.

One of the possible changes that could happen to the existing FDI policy is that Brownfield FDI in pharmaceuticals could be brought under the 100% automatic route (as against 74% at present), given that the Indian government has already introduced several safeguards for/against price gouging, change in product mix, availability of affordable drugs and impact on competition, which used to be the main concerns of foreign players against FDI in domestic pharmaceutical companies.