Written by A. Nair, a PharmTech correspondent based in Mumbai

After months of deliberation, the Indian government has decided not to cap foreign direct investment (FDI) in the pharmaceutical sector and to continue with the 100% FDI regime. A decision in this regard was taken by an inter ministerial group presided over by India’s Prime Minister Manmohan Singh, which sought to allay fears about clearing investments automatically.

Currently, India allows 100% FDI under the automatic route, both in greenfield investments (wherein a company starts a new venture from the ground up), and in existing Indian drug firms. While there is to be no scrutiny of greenfield investments, acquiring a brownfield investment (which involves purchase of an existing production facility), is set to face stringent scrutiny by the country’s competition authority to ensure there is no collusion or predatory pricing.

Given the seven big-ticket acquisitions of Indian drug majors by multinationals, most recently the Abbott-Piramal deal for $3.72 billion, India’s health ministry had raised concerns about marginalization of homegrown firms and subsequent rising medicine costs.

Calling for a FDI cap of 49% to check takeovers, the ministry noted that such buyouts would also undermine the Indian government’s efforts at making generic version of drugs available at affordable prices.
The health ministry was responding to allegations of Big Pharma buying out the competition and creating an oligopolistic market with large companies working as a cartel. Allaying fears, the Indian government has decided to exercise a certain degree of supervision with all future takeovers.

The changed circumstances will ensure that in the initial stages, investments will have to be cleared by the Foreign Investment Promotion Board, while six months down the line, investments will need the stamp of approval of the Competition Commission of India (CCI), which is to double up as a gatekeeper for any anti competitive outcomes.

In the interim, the government is to put in place the essential enabling mechanism for any oversight by the CCI. All M&A deals are to be scrutinized in accordance with the competitive laws of the country with the CCI holding the authority to order a demerger, if the merged entity has been found to be abusing its dominant position or is found to be engaging in any exclusionary practice.

Both multinational and domestic drug makers in India have hailed the move, since the overriding emotion is that any regulatory restrictions on FDI could adversely impact competition which is not in the public interest.
India is the third largest pharmaceutical industry in the world in terms of volume, with total turnover crossing $21.04 billion. During April to July 2011, India received FDI worth $2.99 billion in the pharma sector. With the industry set to become a $20 billion industry by 2015, from its present turnover of $12 billion, FDI will no longer translate to Funds Deserting India.

View this author’s Report from India columns