RBI says non-compete clause for sellers to foreign drugmakers only in special cases

The Reserve Bank of India (RBI) has notified that the non-compete clause will not be applicable in acquisition of existing Indian pharma companies by foreign firms except in certain special cases wherein the Foreign Investment Promotion Board’s (FIPB) approval is required.

FIPB is the top authority which monitors foreign investment in the country. It is part of the finance ministry.

The RBI notification follows revision of the existing FDI policy for pharmaceutical sector by the government in January, 2014.

In January, Department of Industrial Policy and Promotion issued a statement saying that non-compete clauses will require special permission.

Presently, Indian government allows 100 per cent foreign direct investment (FDI) in pharmaceutical sector with automatic approval for green-field units and 100 per cent foreign investment for brown-field operations with government approval.

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 Indian pharmaceutical industry has witnessed major buyouts in the recent past where US-based Abbott Laboratories had acquired domestic formulation business of Piramal Healthcare and Mylan acquired injectable unit of Strides Arcolabs. Such deals have led to calls for banning outright acquisition of Indian pharma companies on the pretext that it would lead to shortage of generic or low-cost drugs.

(Edited by Joby Puthuparampil Johnson)

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