What is the real challenge of FDI Policy in India?

The Central Government’s decision to allow up to 74% FDI as brownfield investment in pharmaceutical companies through the automatic route has serious implications for the industry as well as the people.

With this change in FDI policy, the government has opened up for powerful multinationals and investors the easy route of acquisition of domestic pharmaceutical companies. The target of the multinationals will be large and medium scale family owned or individual controlled pharmaceutical companies.

Multinationals and foreign investors have been campaigning for the brownfield FDI option to be put on automatic approval route. It takes time and effort to set up a new manufacturing company in pharmaceuticals.

The better option is to acquire an established business. Even when the current government policy already allows 100% FDI in greenfield projects through automatic approval route, the industry has failed to attract much FDI inflows under this route. The brownfield FDI allows them to capture the market and dominate the sector at a lesser cost with good returns.

Today, foreign firms are very keen to take over the domestic companies to move into the domestic market and to utilise the production base which the nation nurtured to take care of the domestic public health needs. Foreign firms, big pharma in particular, are known for their neglect of the needs of the poor in the developing countries. Foreign firms did not take interest in serving the goals of affordable quality medicine when they dominated the sector in India.

Experience shows that domestic firms have been more responsive to the incentives and discipline of the Indian government. It was and would be possible to align far better the economic considerations of domestic firms with the goals of public health and industrial development of the country.

R&D productivity crisis

Foreign firms are interested to kill the problem of potential competition from the domestic firms from the roots. Their profitability has been falling due to the growing R&D productivity crisis emerging from their faulty business model and strong intellectual property driven R&D organisation.

Their generic business takeovers are not resulting in the infusion of additional necessary capital into the acquired companies. The foreign owners are only leveraging the built up reserves of the Indian companies. The inflows on account of acquisition often go into the personal accounts of Indian promoters whose re-entry is prohibited by the takeover agreements.

When the acquired companies had foreign private equity (PE) investors already among the major shareholders, the desire to additional stable foreign inflows was not met as part of the takeover proceeds (on account of buyout of foreign PE investors) flew out.

This was evident in the case of acquisition of Paras Pharma and Matrix Labs. In the normal course, it is logical to suggest that, had the companies not been taken over, the Indian companies would have deployed the resources for furthering the operations of the companies.

The changes made in the FDI policy do not provide a corrective for the acquired companies to convert these reserves into production and innovation related investments. The enabling policy framework is missing to make them strategically competitive. In fact, there is evidence that the barriers to entry are growing due to the rising concentration and control of the MNCs in many important therapeutic segments relating to non-communicable diseases.

High and medium level of market concentration is already the case in close to 50% of the domestic market. Consequences of growing market concentration is showing up in either import dependence or availability and affordability of medicines, and change in the control of generic business (including exports).

Policymakers need to address such anti-competitive conduct, it can be done by adding conditions with regard to these practices on the investor through the Foreign Investment Promotion Board (FIPB) at the time of the approval. Attempt to impose the non-compete agreements by Mylan on Agila Specialities and Onco Therapies of Strides Acrolab will illustrate the danger. Although the Competition Commission of India managed to dilute in part the restrictions that aimed at killing the competition from Indian promoters, but one can imagine that when the foreign acquirer has the power what all it can imply for pricing and supply of critical medicines in India.

Transparent conditionality

The FDI policy does not address the expected adverse impact of changing market structure and strategic control on the prospects of local production and innovation and the access to essential medicines.

The FDI policy should introduce a clear and transparent conditionality that will compulsorily all the brownfield investors to undertake ‘greenfield foreign investment’ of a matching amount for the purpose of expansion of activities of ‘production and innovation’ to be undertaken from the basic stage in concerned company. The policy of 74% share of FDI to the foreign investor and the remaining with locals does not attend to the issue of participation of the local investors in the company operations.

The FDI policy should ensure the presence of a local promoter by checking the articles of association, shareholder agreement, collaboration/technology licensing agreements for the qualifications of local partners to be provided for before granting approval to a foreign invested joint venture. The local partner should be an existing player in the industry holding relevant licenses, skilled personnel and having a minimum paid up capital to justify its effective stake in the company and the ability to carry on in case the foreign investor wishes to quit / not to cooperate at any point of time in the future.

The FDI policy should provide for the imposition of additional specific obligations on the investor seeking remedies against anti-competitive behaviour. The investor can be made to divest the business if it is observed that the investor is contributing to import dependence and is not willing to take steps to manufacture the drug locally.
The investor can be made to part with the control of intellectual property if the market concentration and import dependence is found to be growing on account of the business acquired from the domestic market.

Finally, the FDI policy needs to stipulate the obligation of the investees to report on the activities to be undertaken within the stipulated period. The FDI policy needs to introduce the review clause which will allow the government to throw out any conditions inimical to the autonomous development and the anomalies in the socially responsible functioning of the Indian entity. Violations can be dealt with thereon under FEMA appropriately.

(The author is Professor, Institute for Studies in Industrial Development (ISID), New Delhi)