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Pharma FDI: Non-compete clause only in special cases

DIPP had proposed a slew of measures to revamp FDI policy for the sector.

New Delhi | Published: January 9, 2014 4:56:50 pm

PHMForeign investors buying stake in Indian pharmaceutical companies will not be able to enter into a non-compete agreement with promoters of these companies.

The press note issued by the Department of Industrial Policy and Promotion (DIPP) on Wednesday, retained the the existing FDI policy in the pharmaceutical sector, but has decided that the “non-compete clause would not be allowed except in special circumstances with the approval of the Foreign Investment Promotion Board”.

Under the current policy, 100 per cent foreign direct investment (FDI) is allowed in both the greenfield and brownfield pharma projects through automatic and approval route respectively. However, the government can incorporate conditions for FDI in brownfield cases at the time of granting approvals.

In November last year, the DIPP had proposed a slew of measures to revamp FDI policy for the sector. This included a reduction in the FDI cap to 49 per cent from 100 per cent in “critical” pharma verticals. The DIPP cited the series of acquisitions of Indian pharma companies by global firms, which, it said, could impact availability and affordability of generic medicines in the country.

However, the Union Cabinet dismissed the DIPP concerns and decided to retain the existing policy with the additional condition that in all brownfield pharma cases there will not be any non-compete clause in any of the inter se agreements.

Experts said that the press note can be termed as a mixed bag, giving “confusing signals” to the investors. “The move is inconsistent with other measures of reforms taken by the government so far. The press note shows that the policy has been made further restrictive because it applies to both the greenfield and brownfield cases,” Punit Shah, co-head of tax, KPMG, said.

The non-compete clause is a standard feature in mergers and acquisitions whereby it restricts the promoters of target companies from venturing into the same line of business for a specified period. When Daiichi Sankyo tookover Ranbaxy in 2008, it signed a two-year non-compete agreement with Ranbaxy’s promoters.

Similarly, when US-based Abbott Laboratories acquired Piramal Healthcare’s domestic formulations business in 2010, it signed an eight-year non-compete agreement.

This means, Piramal Healthcare’s promoter Ajay Piramal can not enter a similar business for eight years.

The most recent case is that of US-based Mylan’s acquisition of Agila Specialties Pvt Ltd — a subsidiary of pharma firm Strides Arcolab — last month wherein the two have entered into a non-compete agreement of four years.

Goldie Dhama, executive director, regulatory services, PwC, said that though the issuance of a press note is a welcome step, the broad guiding principles for brownfield pharma cases are still missing from the policy.

“Despite so much debate on the matter, the policy still lacks clarity when it comes to brownfield pharma cases. The government should have come out with guiding principles,” he said.

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