FDI pharma policy needs unusual answers

The new government expected to be sworn in by May 2014 will inherit a long list of tasks that need urgent fixing. There will also be pressure to provide clarity on the issue of foreign direct investment in pharmaceuticals industry which has been come under strong attack from opposing lobbies. The solution might lie in some unlikely places, like the public sector or public distribution mechanism.

While there is no decision pending, existing executive orders need clarity urgently. After months of wrangling by various ministries and departments, the Cabinet reiterated on November 29, 2013, that 100% FDI will be allowed in existing Indian pharma companies – without conditions or shackling Indian sellers with a non-compete clause. The hitch though is that the Foreign Investment Promotion Board (FIPB) will have to approve all 100% brownfield applications. However there is no ambiguity in FDI for greenfield investments – up to 100% is allowed under the automatic route. So what’s the big deal?

It’s simple. One, the policy document has a ticking time bomb, which says FIPB will have some sort of say without actually spelling out what it is going to be looking out for. Two, the person selling out can set up another competing unit, and given his knowledge and familiarity with the market and distribution networks, create significant entry barriers. More importantly, the policy which is mired in uncertainty, will find no takers until a new government is installed.

Allowing 100% brownfield FDI has pitted the government’s avowed liberal foreign investment regime against civil society, the domestic manufacturing lobby and some government bodies like the Department of Industrial Policy and Promotion at Ministry of Commerce and Industry, and the Ministries of Health and Chemicals and Pharmaceuticals. Batting for FDI are the Finance Ministry and Planning Commission.

To untangle this issue unscathed will require some deft policy maneuvering. At the core is the apprehension that allowing foreign companies unrestricted access to Indian companies through Mergers and Acquisitions (M&A) – and therefore access to Indian markets for pharma products – could adversely affect availability and prices of critical drugs. It is also true that pharma MNCs want access to cheaper Indian generic manufacturing capacity to create a beachhead in global markets. Indian pharma exports have jumped 66% in four years — from $8.7 billion in 2008-09 to $14.6 billion in 2012-13.

It is equally true that once the FDI policy for pharma was announced, over 90% of the applications submitted to FIPB related to M&As in existing Indian pharma companies. Between April 2010 and July 2013, FIPB has cleared 43 FDI proposals worth Rs 13,165 crores.

Shaken by the torrent of proposals for acquisitions, the DIPP started lobbying with the Cabinet to impose conditions like limiting FDI in brownfield to 49% and making investors commit to a minimum expenditure for research and development. DIPP insisted that a decision be taken at the level of the Prime Minister’s Office. It found an unlikely ally – the Parliamentary Standing Committee on FDI in Pharmaceuticals, which in its report of August 2013 advocated for a complete halt to brownfield FDI.

Consequently, it was decided that the Competition Commission of India (CCI) would approve of FDI applications, instead of the FIPB. The Ministry of Corporate Affairs was requested to assess the need for additional amendments to the Competition Act, so that the CCI could be vested with powers to impose conditionalities on pharma M&As. Meanwhile, FIPB would approve of all brownfield FDI proposals and impose certain conditionalities – such as continuing with R&D expenditure for five years – wherever it deemed necessary. The conditions requiring FIPB intervention are still unclear.

This is when the Cabinet decided last November that “the current policy in brownfield and greenfield projects in the pharmaceutical sector will continue…”

The policy is bound to foment protests, especially when the new government approaches Parliament to amend the Competition Act or when the FDI policy is redrafted to vest CCI with additional powers. Concerns about public health will continue to remain paramount.

There are a couple of ideas that might work. A template is available with the banking industry. The government could mandate all generic manufacturers to set aside a proportion of their production capacity – say, 20% or 30% – to distribute to the poor. This is not without some inherent pitfalls like chances of leakages or records being tampered with. It is better to arm the CCI with powers to restrict abuse of dominant power and price gouging.

Interestingly, the Parliamentary Standing Committee suggests that attempts should be made to revive ailing public sector pharma companies so that they can provide generics at affordable prices. It also wants the procurement and distribution mechanism for cheap generic drugs implemented by the Tamil Nadu and Rajasthan governments to be replicated at the national level.

The two measures could help address public health concerns without vitiating the investment climate, and leave the FDI policy free of all complications.

Rajrishi Singhal is Senior Geoeconomics Fellow, Gateway House: Indian Council on Global Relations.

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