Express Pharma

Consolidated FDI policy 2017 – Implications on pharmaceuticals and healthcare sector

22

Rabindra Jhunjhunwala, Partner, Khaitan & Co and Sameer Sah, Associate Partner, Khaitan & Co share their insights on various aspects of the consolidated FDI policy 2017 and the impact of the life sciences sector

20171031ep18
Rabindra Jhunjhunwala

Ever since the government introduced the concept of the Consolidated Foreign Direct Investment policy circular (the Consolidated FDI Policy), it has been one of the most sought-after documents expressing government policy. Not only does it have far-reaching ramifications on the inflow of foreign direct investment in India, it also represents an effort by the administration to gradually simplify and promote ease of reviewing and understanding regulations relating to doing business in India. Initial versions of the Consolidated FDI policy were released in two parts, one in April and  the other in October with a sunset period of six months. Gradually, the government has done away with the concept of introducing two such circulars in a year, and now the government introduces only one such circular. The timing of course has become slightly stretched from April as is usual, to August in 2017. The latest version of the Consolidated FDI Policy was issued on August 28, 2017. This version consolidates all the changes that have taken place on the FDI policy by way of press notes, standard operating procedures,  etc., over the last one year or so.

Pharmaceuticals and healthcare Sector

20171031ep19
Sameer Sah

Specifically, for the pharma  and healthcare sector, the Consolidated FDI Policy essentially consolidates the various pronouncements over the last 12 months and as such does not create new stipulations. Some of the relevant changes from the last version of the FDI policy are highlighted below:

  1. FDI up to 74 per cent permitted under automatic route: Under the erstwhile FDI policy, FDI in brownfield pharma investment proposals required prior government approval. However, in June 2016, the government had relaxed this requirement to specify that FDI was permitted under the automatic route without any government approval up to 74 per cent, and for investment being 74 per cent and above, government approval would be required. This change from June 2016 has been included into the Consolidated FDI policy.
  2. Non-compete restrictions: Despite the relaxation described in point 1 above, an investor should be mindful that the much debated non-compete restrictions will still continue to apply to all foreign investments, except of course where prior approval from the government is obtained based on ‘special circumstances.’
  3. Conditionalities: Additionally, conditions which were typically imposed by the government through the approval process (namely, maintenance of production levels of essential medicines, R&D expenses on essential medicines, etc.) will nevertheless continue to apply to all brownfield investment proposals notwithstanding the relaxation mentioned in point 1 above, and will be enforced on a self-declaration basis.
  4. Asset transfers: It is debatable whether asset transfers/ business transfers involving a purchaser being an Indian company having more than 74 per cent FDI would be transactions that required prior government approval. Based on the past practice of the government, and the policy stance adopted by the government, one would lean in favour of classifying such transactions as approval route transactions.
  5. Additional FDI in the same entity: The erstwhile FDI policy had clarified that if approval had been obtained for a particular foreign ownership percentage or for fresh investments into a wholly- owned subsidiary, in that situation prior approval would not be required for additional investments provided the foreign equity percentage is maintained. However, the latest version of the Consolidated FDI policy has clarified that the additional investment that can be brought in without prior approval would be capped at a cumulative aggregate amount of Rs 5000 crores. Above this amount, prior approval will have to be sought. Therefore, for MNC wholly-owned subsidiaries in India, it would be relevant to assess what is the additional FDI brought into the company post the last round of approvals before raising any future funds from shareholders by way of FDI.
  6. Process for government approval: As a part of the budget speech for 2017-18, the  Finance Minister had announced that the FIPB would be abolished. This was done in June 2017 and certain standard operating procedures were published to clarify how such matters would be dealt with going forward. The details of the standard operating procedure, to the extent relevant, have been incorporated into the Consolidated FDI policy. Specifically, for the pharma sector, the approval would now be given by the Department of Pharmaceuticals, which is a part of the Ministry of Chemicals and Fertilisers. The process will be managed by this department along with the Department of Industrial Policy and Promotion which is a part of the Ministry of Commerce and Industry.

There are additional generic changes to the Consolidated FDI Policy which may also have relevance to the healthcare and pharma sectors. These include, reference to permissibility of deferred consideration structures in transactions, relaxations pertaining to FDI in start-ups, permissibility to capitalise pre-incorporation expenses, etc.

Comments are closed.