Changing the FDI policy won’t improve the availability of essential drugs.
Last week, the Union cabinet decided not to make any more major changes to India’s foreign direct investment (FDI) policy for pharmaceuticals, at least for the time being. From turning virtually hostile to FDI in pharma, the policy is now back to being what it used to be if not warmly welcoming then at least not dead in the water from the point of view of foreign investors. Let me explain.
Roughly 11 years ago, India liberalised the FDI norms for the drug industry. It allowed the automatic approval of FDI, up to 100 per cent, in Indian drug companies. For about five years, nothing much happened. Then, Indian businessmen began to sell out to foreigners in big-ticket deals and the policy, while not actively encouraging them to do so, definitely did not stand in their way. These sales rattled some parliamentarians, homegrown industry bodies and civil society groups. They voiced fears that this would lead to a shortage of affordable, essential medicines for the Indian consumer as the buyers restructured the businesses and whittled down the local industry.
So in 2012, the government bowed to their demands and changed the policy slightly. An acquirer who wished to buy over 49 per cent in a company (that is, a controlling stake) now needed the approval of the Foreign Investment Promotion Board, which, among other things, required the buyer to maintain a level of investment in research and development and the production of essential medicines for five years. This by itself seemed fairly arbitrary. Why not four or six years?
However, this did not satisfy the worrywarts, including India’s commerce ministry. The latter recently proposed the creation of a new category of “rare/ critical” drugs, such as vaccines, where FDI beyond 49 per cent would be forbidden. It also proposed onerous conditions on any buyer, such as investing a minimum of 25 per cent of the deal value in enhancing manufacturing/ research capabilities. Additionally, it wanted the removal of non-compete clauses between the buyer and seller. Buyers usually insist on this clause to prevent sellers from using their knowhow of the acquired business to start a rival firm. It is this proposed iteration of the FDI policy that the Union cabinet has rejected as hostile to foreign investors, though it has agreed in its wisdom to do away with the non-compete clause.