FDI in pharma and related implications of COVID-19
Arvind Sharma, Partner - M&A and General Corporate, Shardul Amarchand Mangaldas & Co states that the pharma sector is well poised, and is looking forward to attract FDI and exploit the many opportunities created by COVID-19
Foreign direct investments (FDI) have played a significant role in developing the Indian pharma sector, and it has resulted in access to global capital markets and financial resources, access to larger consumer markets, generation of new employment opportunities, increase in research and development and increase in net foreign exchange earnings.
FDI has contributed considerably in setting India as the “Pharmacy of the World”. India is now home to the third-largest pharma industry in terms of volume and tenth largest in terms of value, and it is the largest provider of generic medicines globally.
By way of information, it may be noted that 100 per cent FDI is permitted in the pharma sector, with the conditions that FDI up to 100 per cent in greenfield pharma projects is permitted under the automatic route; and FDI up to 74 per cent in brownfield pharma projects is permitted under the automatic route. FDI in brownfield projects (under automatic and approval route) will be subject to compliance with the conditions that: (a) the production level of National List of Essential Medicines drugs and / or consumables and their supply to the domestic market at the time of induction of FDI is to be maintained over the next five years at an absolute quantitative level; (b) the research and development expenses in value terms is to be maintained for the next five years at an absolute quantitative level as at the time of induction of FDI; and (c) the relevant investee company shall provide all information pertaining to the transfer of technology, if any, along with induction of foreign investment into the investee company to the Ministry of Health and Family Welfare, Department of Pharmaceuticals. This legislative framework is with a view to protect the domestic pharma industry, ensure that the supply of essential medicines is not adversely impacted, and increase research and development.
Recently, there have been certain opportunistic takeovers in the backdrop of the fragile economic situation caused by COVID-19, and in order to deal with the same, the Government of India (GOI) has tweaked the FDI policy in April 2020 and mandated prior GOI approval for investment from bordering countries (including China). This has caused a lot of inconvenience to Indian investee companies, including in the pharma sector. Relevant administrative ministries are requesting for declarations regarding direct and indirect investments and beneficial ownership from bordering companies and making such declarations is extremely challenging and time-consuming. In global and cross-holding structures, it is difficult to ascertain who the ultimate beneficiaries of investments into India are. In some cases, investments are held by various funds, and ascertaining the beneficiary in such a situation becomes challenging. Besides, the time taken by the relevant administrative ministry to screen beneficial ownership data, and ultimately approve or reject an application has brought uncertainty over ongoing transactions, which are executed, and are yet to close and new transactions.
India has recently banned many Chinese apps and is screening all that comes in from China or is China-related, be it investments, goods or services. This has led to uncertainty about the future of Indo-China trade relations, and this is already having a significant adverse impact on the pharma sector as India sources a substantial amount of raw material, active pharma ingredients and key starting materials from China.
Consolidation and resultant M&A is a key driver for the pharma sector. Owing to the global economic slump, weak investor confidence, low demand, etc., FDI has generally been slow in the pharma sector and this has had an impact on the growth of this sector. People are waiting to do things at the ‘right time’.
No matter how bad the situation may seem, the repercussions of COVID-19 have also led to a huge opportunity for India, as the developed world is frustrated with China, and they are looking to shift their manufacturing base to other countries, and India is turning up to be a preferred destination. We can expect voluminous FDI, importantly in the pharma sector, as investments may be pulled out of China, and be made into India and other developing countries. In order to encourage companies exiting China, the GOI intends to offer a red-carpet treatment, and it is already working on simplifying entry process and ensuring ease of doing business in India.
The pharma sector is well poised and is looking forward to attract FDI and exploit the many opportunities that COVID 19 has created. This will go a long way in tackling the present health crises and ensure safer lives and better livelihood. It is a win-win situation for the pharma sector.