Investment policy rethink needed for pharma sector

Foreign investments in the pharmaceutical sector are being heavily scrutinized by the Foreign Investment Promotion Board (FIPB). Until 2011, foreign investment in this sector was permitted up to 100% under the automatic route. In 2011, the government amended its policy such that investments in green-field pharma enterprises are permitted up to 100% under the automatic route and investments in brown-field pharma enterprises require prior approval.

The amendment was triggered by public policy concerns. The government thought that the acquisition of several Indian pharma companies by foreign entities could impact production levels and prices of essential drugs.

Viable alternative?

Despite the laudable objectives behind the policy change, it is useful to examine whether the twin objectives of availability and affordability of essential medicines could be met through existing regulations, without hindering genuine inflows of foreign direct investment (FDI).

Through the Drugs (Prices Control) Order, 2013, issued by the National Pharmaceutical Pricing Authority, the government will be able to regulate prices of essential medicines and has the right to require drug manufacturers to increase production or undertake sales to specific persons in case of emergencies. It may be practical to stringently apply and make effective these regulations rather than to require approval for all brown-field foreign investments, particularly because the above objectives are applicable irrespective of whether an entity is foreign owned or Indian owned and therefore introducing this provision in the FDI policy seems irrational.

Concerns about research and development expenditure commitments and ensuring continuity of production of essential medicines in cases of brown-field investments can always be separately addressed by imposing conditions under the FDI policy, without the need for the FIPB to individually scrutinize each transaction.

Akila Agrawal is a partner and Sourav Kanti De Biswas is a principal associate at Amarchand & Mangaldas & Suresh A Shroff and Co, New Delhi. The views expressed in this article are those of the authors and do not reflect the position of the firm.