Govt retains 100% FDI in pharma but says non-compete clause for sellers only in special cases

The Indian government has decided to retain the existing policy for foreign direct investment (FDI) which allows 100 per cent foreign investment in the pharmaceutical sector but said non-compete clauses would be permissible only in special cases. 

While this brings to an end years of opposing views within different units of the government, with one side pushing for a ceiling on FDI in the sector in the wake of some big deals where Indian drugmakers were acquired by foreign players, it puts an important rider which could affect deal-making in the sector. 

Non-compete clauses are de rigueur in M&As where the sellers agree not to launch a similar venture in the same domain. This is to safeguard the interest of the buyers as in the absence of such a clause the seller can start afresh with a new plant and possibly even hiring employees of the firm they have just sold. 

"The government has reviewed the position in this regard and decided that the existing policy (100 per cent FDI in pharma) would continue with the condition that 'non-compete' clause would not be allowed except in special circumstances with the approval of the FIPB," the Department of Industrial Policy and Promotion (DIPP), the nodal body for FDI policy in India and part of commerce and industry ministry, said in a press note. 

FIPB or Foreign Investment Promotion Board is the top authority which monitors foreign investment in the country. It is part of the finance ministry. 

The issue related to restricting foreign investment in pharma started with Ranbaxy’s acquisition by Daiichi Sankyo and thereafter Piramals selling domestic formulations business to Abbott. More recently, Mylan bought a part of Strides Arcolab.

Large transactions like these had raised concerns that such corporate deals would lead to increase in price of medicines as innovator drugmakers would eventually push up the cost of medication locally by discontinuing low priced generic versions of products.

Such concerns had previously led to delay in clearance of government approval for inbound acquisitions by foreign drugmakers.

Last year, in the consolidated FDI policy, the government had decided to retain 100 per cent FDI for pharma with automatic approval for greenfield units and 100 per cent foreign investment for brownfield operations with government approval.

Thereafter one proposal had sought to reduce foreign equity cap to 49 per cent from 100 per cent in “critical” pharma verticals.

(Edited by Joby Puthuparampil Johnson)

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