Over the years, India has been a centerpoint for manufacturing and for supply of affordable generic medicines across the world and consequently the Pharmaceutical sector has witnessed a steady flow of foreign direct investment (FDI). India occupies a 20% share in global supply by volume, and also supplies 62% of global demand for vaccines. It ranks 3rd worldwide for production by volume and 10th by value, thereby accounting for around 10% of world's production by volume and 1.5% by value.

The country is home to more than 3,000 pharma companies with a strong network of over 10,500 manufacturing facilities. The domestic pharmaceuticals market turnover reached US$ 20.03 bn in 2019, up 9.3% from 2018, growing as penetration of health insurance and pharmacies rise.

And owing to the crisis put forth by Covid19 pandemic, the pharma sector has gained much of the global attention, with many global players opting to move their operations out of China, and therefore India with its growing market and economical manforce, offers to be a strong alternative contender.

India has a distinct advantage in this area and the good news is that the Indian government is also pushing for reforms and rolling out the red carpet for businesses looking to invest in India.

Let us now understand what is the policy and other conditions that govern the FDI in Indian Pharma sector and what will be the possible impact of covid19 on the same.

FDI Policy for Pharmaceutical Sector

Changes that the FDI Policy for Pharma sector has witnessed over the last decade:

FDI policy for investment in the pharmaceuticals sector in India has undergone many significant changes in the last decade.

Prior to 2011, 100% FDI was permitted for manufacture of drugs and pharmaceuticals under the automatic route (i.e. for which no prior government approval is required).

In 2011, following a sudden increase in the number of takeovers of domestic pharma companies, there was a concern regarding availability of essential medicines, research and development and availability of technology, which forced the FDI policy to be revised in order 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 so as to attract investment for setting up of new manufacturing units, research and development and technology acquisition. And as far as brownfield investments were concerned, any amount of FDI required prior government approval.

In 2014, the FDI policy was further revised to add a condition prohibiting a non-compete clause in the inter-se agreements, except in special circumstances, and that too only with the approval of the Government. This condition was made applicable to both brownfield and greenfield FDI.

Further, In 2016, the Government of India, in its endeavour to attract foreign investment in the Pharmaceutical sector, relaxed the FDI Policy for brownfield pharmaceuticals, and also imposed certain conditions for FDI in brownfield pharmaceuticals, under both automatic and government approval routes.

Present Policy:

The latest FDI Policy for greenfield and brownfield investment, is explained below:

For Greenfield FDI:

FDI in Greenfield Pharmaceuticals is allowed under 100% Automatic Route, which implies that no government approval is required for making the investment.

What is Greenfield FDI in Pharma?

Greenfield investment means the investment in new plants. Greenfield investments refer to those investments where the foreign investor invests in the construction of new production and operational facilities from the ground up, and also requires availing of industry licences etc.

For Brownfield FDI:

FDI in Brownfield Pharmaceuticals is permitted for up to 74% under the automatic route. However, investments above 74% are made under the approval route, for which the government approval is required.

The competent authority for grant of approval for FDI in the Pharmaceuticals sector is the Department of Pharmaceuticals.

What is Brownfield FDI in Pharma?

Brownfield investment refers to investment in an existing plant. Brownfield investment is usually made through M&A. Brownfield investment is preferred over the greenfield investment as it saves the initial time and cost to start-up a project because essential infrastructure (such as production facility, capital equipment, local labour and local approvals, etc.) already exists, and is a relatively quicker and cheaper alternative to a greenfield project.

Exception for Medical Devices

FDI up to 100%, under the automatic route is permitted for manufacturing of medical devices. This is applicable to greenfield as well as brownfield projects.

Definition of Medical Devices: (According to Consolidated FDI Policy, 2017)

Medical device means:

1. any instrument, apparatus, appliance, implant, material or other article, whether used alone or in combination, including the software, intended by its manufacturer to be used specially for human beings or animals for one or more of the specific purposes of:
   
   • diagnosis, prevention, monitoring, treatment or alleviation of any disease or disorder;
   • diagnosis, monitoring, treatment, alleviation of, or assistance for, any injury or handicap;
   • investigation, replacement or modification or support of the anatomy or of a physiological process;
   • supporting or sustaining life;
   • disinfection of medical devices;
   • control of conception, and which does not achieve its primary intended action in or on the human body or animals by any pharmacological or immunological or metabolic means, but which may be assisted in its intended function by such means;
      
2. an accessory to such an instrument, apparatus, appliance, material or other article;c. a device which is reagent, reagent product, calibrator, control material, kit, instrument, apparatus, equipment or system whether used alone or in combination thereof intended to be used for examination and providing information for medical or diagnostic purposes by means of in vitro examination of specimens derived from the human body or animals.
    

(The definition of medical device above would be subject to the amendment in Drugs and Cosmetics Act)

What are the other conditions that need to be fulfilled for Investing in the Indian Pharma Sector?

Following are the conditions that are applicable to both, greenfield and brownfield FDI:

1. Non-compete' clause would not be allowed under both automatic and government approval routes, except in special circumstances and that too only with the approval of the Government.
    
2. The prospective investor and the prospective investee are required to provide a certificate along with the application for foreign investment as per Annexure-10.
    
3. Government may incorporate appropriate conditions for FDI in brownfield cases, at the time of granting approval.

Furthermore FDI in brownfield pharmaceuticals (under both automatic and government approval route), is further subject to the compliance of following conditions:

1. The production and supply level of certain medicines at certain rates to be maintained at the time of induction of FDI, being maintained over the next five years.
    
2. R&D (Research and Development) expenses being maintained in certain value terms for 5 years at the time of induction of FDI.
    
3. The administrative Ministry will be provided complete information pertaining to the transfer of technology, if any, along with induction of FDI into the investee company.
    
4. The administrative Ministry (Ministry of Health and Family Welfare, Department of Pharmaceuticals or any other regulatory Agency/Development as notified by Central Government from time to time), will monitor the compliance of these conditions.

Opportunities Presented By Covid19

As mentioned earlier, owing to the crisis put forth by Covid19 pandemic, the Pharma sector has gained much of the global attention lately, with many global players opting to move operations out of China, and therefore India offers to be a strong alternative contender, particularly because of the growth scale that its market possesses and cheap manpower. Also such investments would help India in reducing the domestic dependencies of its Pharma manufacturers who look over to China for importing APIs (Active Pharmaceutical Ingredients).

India has a distinct advantage in this sector and the Indian government is also pushing for favorable reforms and rolling out the red carpet for businesses looking to invest in India. Therefore now more than ever, the investment in this sector is likely to gain further momentum.

Recently, the Government of India has recently announced a package of INR 140 billion for setting up bulk drugs and medical devices parks. Funds allocated herein are to be utilized for financing common infrastructure facilities and incentivising domestic production of bulk drugs/ APIs and medical devices, in order to reduce the dependency on China for import, and further giving a further boost to pharma manufacturing in India and attracting further investments in the Pharma sector.

Conclusion
India's FDI policy for investment in the pharma sector has undergone significant changes in the past decade. And now owing to the Covid19 crisis, the Pharma sector is in the center of hot global attention, and with the businesses willing to move out of China, India stands a much prospective opportunity in the near future in terms of attracting Foreign Direct Investment in the Pharmaceutical sector.

One of the possible change that could happen in terms of the extant FDI policy, is that the brownfield FDI in Pharma might be brought under 100% automatic route (as against 74% presently), given that Indian government has already placed several safety measures for/against price hike, change in product mix, availability of affordable drugs and impact on competition, which used to be the major concerns against FDI in domestic pharma companies by foreign players.

References:

1. https://www.thehindubusinessline.com/news/dwindling-fdi-in-pharma-medical-devices-worries-industry/article27526068.ece#
2. Consolidated FDI Policy(Effective from August28, 2017)
3. https://corporate.cyrilamarchandblogs.com/2020/06/fdi-in-brownfield-pharma-will-covid-19-be-the-catalyst-for-policy-reform/
4. https://www.investindia.gov.in/sector/pharmaceuticals
5. https://www.fdi.finance/sectors/pharmaceuticals