FDI in Pharma; Non-Compete

According to the prevailing annual FDI policy
notified by the Government in April 2013, foreign direct investment (FDI) in
the pharmaceuticals sector is allowed up to 100%. While FDI is allowed in greenfield
projects under the automatic route, FDI in brownfield projects requires prior
Government permission.
Given the numerous acquisitions of Indian pharma players by
multinational companies in recent years and also the concerns relating to
affordability of essential drugs and public health, the Department for
Industrial Policy and Promotion (DIPP) had floated
the idea
of reducing the FDI sectoral limit in brownfield projects from
100% to 49%. However, last week, after a review of this proposal the Cabinet
decided to retain the 100% FDI limit but imposed some restrictions on
non-compete clauses.

way of
Note 1 (2014 series)
issued on 8 January 2014, the existing sectoral limits
on FDI have been retained. In order to assuage wider concerns, the Government
has stipulated that “non-compete” clauses will not be allowed except in special
circumstances with the approval of the Foreign Investment Promotion Board
(FIPB). Therefore, Indian companies or promoters who divest their stakes in
domestic pharma companies would be free to establish their own ventures in the
same field. Foreign acquirers would not be able to limit the same. While the
possibility of applying to the FIPB for specific dispensation to include
non-compete clauses does exist, there are no guidelines specified for the
exercise of discretion, which will be left to a case-by-case analysis.

About the author

Umakanth Varottil

Umakanth Varottil is an Associate Professor at the Faculty of Law, National University of Singapore. He specializes in corporate law and governance, mergers and acquisitions and cross-border investments. Prior to his foray into academia, Umakanth was a partner at a pre-eminent law firm in India.

1 comment

  • It is incredible the way we make law in this country. Minimal application of mind. The restriction was clearly formulated keeping in mind the recent buy-outs of Indian Pharma companies. No one seems to have thought about the various other forms of investments/partnerships that the FDI route can be used for. Which foreign investor is going to put in money if the Promoter can set up a competing business the next day after the investment? One only hopes that the lords sitting in judgement in FIPB meetings have the good sense to understand these not very subtle distinctions.

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