Introduction

India’s position as the ‘Pharmacy of the World’ is cemented by its robust healthcare and pharmaceutical industry. Currently, the pharmaceutical sector is one of the top ten attractive sectors for foreign investment in India. It contributes approximately 3.71% of the nation’s total Foreign Direct Investment (“FDI”) inflows ¹. In the financial year 2022-23, the sector saw an FDI inflow of USD 2.05 billion indicating a 45.4% increase from the previous financial year ². The Indian pharmaceutical industry is expected to reach USD 130 billion by year 2030 ³.

Notably, the term ‘pharmaceutical’ has not been defined under any Indian law. However, it is commonly used in relation to drugs, cosmetics, and medical devices, which have been defined under the Drugs and Cosmetics Act, 1940 and its associated rules. Enterprises involved in the development, manufacture, marketing, and sale of drugs, cosmetics, and medical devices are said to be part of the pharmaceutical industry. 

This note analyses the law pertaining to the pharmaceutical sector in India with a specific focus on understanding the regulations of the Foreign Exchange Management Act, 1999 (“FEMA”).

History of FDI in Pharmaceutical Manufacturing

FEMA governs FDI in India alongside the Foreign Exchange Management Non-Debt Instrument Rules, 2019 (“NDI Rules”) and the Government of India’s consolidated FDI policy. The Department of Industrial Policy and Promotion (DIPP) and the Ministry of Commerce and Industry also issue press notes to introduce policy pronouncements in the FDI policy. 

The Indian FDI policy for the pharmaceutical sector has evolved over the years. Prior to 2011, 100% FDI was permitted in the manufacturing sector under the approval route.⁴ To boost FDI in new projects while safeguarding existing pharmaceutical companies from the threat of foreign takeovers, the government decided to amend this position by distinguishing investments into greenfield and brownfield under Press Note No. 3 (2011 Series) (“Press Note 3”). Greenfield investments involve foreign companies building their own manufacturing facilities from the ground up, while brownfield investments involve foreign companies acquiring existing domestic facilities for manufacture.  

As per Press Note 3, greenfield investments were allowed 100% FDI under the automatic route (i.e.) without prior approval from the Foreign Investment Promotion Board (FIPB). In contrast, brownfield investments were under the approval route, where 100% FDI required prior approval from the FIPB.⁵ The government provided further clarification on foreign investment in the pharmaceutical sector via Press Note 1 (2014 Series), stating that non-compete clauses in inter-se agreements would only be allowed in special circumstances with FIPB approval.⁶ During Covid-19 pandemic, to prevent opportunistic takeovers of Indian companies, the Indian Government implemented protective measures, such as stipulating that entities or individuals from countries sharing a land border with India could invest in pharmaceutical companies solely through the approval route.⁷

Current Position of Law

In 2020, the Indian Government consolidated the amendments made through the previous press notes and released the consolidated Foreign Direct Investment Policy, 2020⁸ (“FDI Policy 2020”), which is also reflected in the NDI Rules.⁹

According to the FDI Policy 2020, greenfield investments and brownfield projects are eligible for 100% FDI for the pharmaceutical sector. While greenfield projects can receive 100% FDI without prior approval,  brownfield projects can receive up to 74% FDI under the automatic route, and any foreign investment exceeding 74% requires government approval. On the other hand, the FDI Policy 2020 mandates that brownfield investments meet certain conditions such as maintaining minimum production levels of essential medicines and research and development expenses.¹⁰

Interestingly, the FDI Policy 2020 permits 100% FDI for medical devices under the automatic route for greenfield and brownfield projects. This has been done to promote local medical device manufacturing in the country and reduce import dependence. 

FDI in E-Commerce

The growth of e-commerce in India has also impacted the sale of pharmaceuticals. Companies have established dedicated e-commerce platforms for the sale of pharmaceuticals, commonly referred to as e-pharmacies. E-pharmacies have become extremely popular in India, and the market is growing at a Compound Annual Growth Rate (CAGR) of 10% ¹¹. E-commerce is divided into an inventory-based model and a marketplace model.¹² In the inventory-based model, the inventory of goods and services is owned by the e-commerce entity, and under marketplace model, the company provides an information technology platform on a digital network to act as a facilitator between the buyer and the seller.¹³ As per the FDI Policy 2020, 100% FDI under the marketplace model via the automatic route is permitted, while FDI under the inventory-model is prohibited. Therefore, E-pharmacies in India function on a marketplace model to ensure easy availability of foreign funding. 

Single Brand and Multi-Brand Retail Trading

Single Brand Retail Trade (“SBRT”) is a type of retail trade in which different products are sold under one brand and are branded during manufacture. Enterprises engaged in SBRT can have 100% FDI under the automatic route. However, in cases where FDI in an SBRT enterprise is beyond 51%, 30% of the goods sold must be sourced from India. Further, the products sold under the brand in India must be sold under the same brand internationally.  

On the other hand, Multi Brand Retail Trade (“MBRT”) is a kind of retail trade where goods are sold under multiple brands. The FDI Policy 2020 permits FDI up to 51% under the approval route for MBRT enterprises.¹⁴ The FDI Policy 2020 also requires a minimum investment of USD 100 million to be brought in via FDI in the case of MBRT, out of which at least 50% is required to be invested in back-end infrastructure within 3 years.¹⁵

The growth of the retail sector and the pharmaceutical industry’s manufacturing sector has resulted in companies trying to merge operations by carrying out activities in both sectors. Generally, drugs in India are manufactured and retailed under different brand names. It has been observed that drug manufacturing companies have begun acquisitions of e-pharmacies and retail companies, while retail market players have forayed into drug manufacturing.¹⁶ While this is currently limited to Indian companies that have not undertaken foreign investment, FDI concerns may exist in cases where companies accept foreign investment. As per the FDI Policy 2020, FDI in MBRT is permitted at 51% under the approval route, while FDI in pharmaceutical manufacture is permitted at different levels for greenfield and brownfield investments. If an enterprise engaged in both the manufacture and retail trade of pharmaceuticals, wishes to raise foreign investment for both manufacture and retail trade, there are no guidelines on how such approvals would be approved. To bypass these complications and ensure a smooth inflow of FDI, enterprises can form two distinct subsidiary companies engaged in manufacturing and retail trade and avail FDI for each company separately.

Conclusion

India continues to be a preferred destination for foreign investment by international pharmaceutical companies due to the low cost of manufacture, tremendous market access and strong backing by the government. Recent amendments to the FDI policy of the government have also provided an added impetus to promoting FDI in the country. The inflow of FDI in the sector has helped increase manufacturing capability by resource sharing, advancement of technology and generating jobs in the country. The industry’s outlook in India continues to remain positive as governments seek legitimate alternatives to China.

[1]https://pharmaceuticals.gov.in/sites/default/files/Annual%20Report%202022-23%20Final-3_0.pdf

[2]https://www.thepharmaletter.com/article/inflow-of-fdi-into-india-s-pharma-sector-swells-by-45-in-fy23

[3]https://www.thehindu.com/business/pharma-industry-to-grow-to-130-billion-by-2030/article66219479.ece

[4]Press Note No. 4 (2001 Series) (Ministry of Commerce and Industry), https://dpiit.gov.in/sites/default/files/pn44.pdf.

[5]Press Note No. 3 (2011 Series) (Ministry of Commerce and Industry), https://dpiit.gov.in/sites/default/files/pn3_2011_1.pdf.

[6]Press Note No. 1 (2014 Series), (Ministry of Commerce and Industry), https://dpiit.gov.in/sites/default/files/pn1_2014_0.pdf.

[7]Press Note No. 3 (2020 Series) (Ministry of Commerce and Industry), https://dpiit.gov.in/sites/default/files/pn3_2020.pdf.

[8]https://dpiit.gov.in/sites/default/files/FDI-PolicyCircular-2020-29October2020_1.pdf

[9]Foreign Exchange Management (Non-Debt Instrument) Rules, 2019 (Ministry of Finance), https://thc.nic.in/Central%20Governmental%20Rules/Foreign%20Exchange%20Management%20(Non-debt%20Instruments)%20Rules,%202019.pdf

[10]Para 5.2.15.4, Consolidated Foreign Direct Investment Policy, 2020 (Ministry of Commerce and Industry), https://dpiit.gov.in/sites/default/files/FDI-PolicyCircular-2020-29October2020_0.pdf.

[11]https://www.businesstoday.in/industry/pharma/story/why-indian-retail-pharmacy-sector-is-on-a-growth-trajectory-430107-2024-05-18

[12]Press Note No.3 (2016 series), (Ministry of Commerce and Industry), https://dpiit.gov.in/sites/default/files/pn3_2016_0.pdf

[13]Para 5.2.15.2.2, Consolidated Foreign Direct Investment Policy, 2020 (Ministry of Commerce and Industry), https://dpiit.gov.in/sites/default/files/FDI-PolicyCircular-2020-29October2020_0.pdf.

[14]Para 5.2.15.4, Consolidated Foreign Direct Investment Policy, 2020 (Ministry of Commerce and Industry), https://dpiit.gov.in/sites/default/files/FDI-PolicyCircular-2020-29October2020_0.pdf.

[15]Para 5.2.15.4, Consolidated Foreign Direct Investment Policy, 2020 (Ministry of Commerce and Industry), https://dpiit.gov.in/sites/default/files/FDI-PolicyCircular-2020-29October2020_0.pdf.

[16]https://www.livemint.com/Industry/bGt22LGicVOvs3J4zxuC3I/Riftwidensinpharma-industryas-retailers-enter-manufactur.html