Partially in response to a number of high-visibility inbound acquisitions in the Indian pharmaceutical sector, the government of India decided to bring brownfield acquisitions completely under the government approval route in November 2011. Greenfield acquisitions, however, remained under the automatic route. While granting approvals, the (then) Foreign Investment Promotion Board began imposing stringent conditions prohibiting non-compete restrictions on Indian parties and requiring the maintenance of status quo on production and supply of drugs and consumables in the national list of essential medicines and R&D expenditure. In the following years, these conditions were formally introduced to the foreign direct investment (FDI) policy. In June 2016, realizing the need to encourage brownfield FDI, the government decided to allow investment of up to 74% under the automatic route.
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Last year, the government also brought FDI in companies without operations or downstream investments under the automatic route. This was, however, subject to conditions that the intended activities of such companies should fall under sectors that are allowed under the automatic route and in sectors without foreign investment-linked performance conditions, which was defined as sector-specific conditions for FDI.
This leads to some interesting situations. If a minority Indian partner incorporates a joint venture company and the foreign partner subsequently infuses 74% capital into the venture over a few months, this raises the question whether the investment will be classified as greenfield or brownfield. Logically, one can argue that the investment should be classified as greenfield if the venture has yet to begin operations in earnest at the time of the investment. There is, however, another conundrum. Clearly, FDI in companies not having operations is permitted under automatic route only if intended activities also fall under automatic route and in sectors without FDI-linked performance conditions.
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Vikrant Kumar is a partner and Anina D’Cunha is an associate at L&L Partners. The views expressed are personal and intended for general information purposes. They are not a substitute for legal advice.
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