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Caveat in drug FDI policy

New Delhi, Jan. 8: The government has decided to continue with the policy of letting foreign investors acquire 100 per cent equity in domestic pharma companies, overruling the objections of many of its departments, including the health ministry.

However, the government notification today made it clear that “non-compete” clauses can’t be inserted by multinationals in takeover agreements, except “in special circumstances” with the approval of the Foreign Investment Promotion Board (FIPB).

Besides, the notification said that each case of foreign acquisition would be decided on a case-by-case basis by the FIPB, ignoring the demands of MNCs for automatic approval.

Automatic approval for 100 per cent FDI in pharma is allowed only in new projects.

While the finance ministry and the Planning Commission were in favour of fewer curbs, the health ministry and the department of chemicals wanted to restrict foreign investment in generic medicines critical to public health.

The latter argued that multinationals could be in a position to control the market and raise prices of life-saving drugs not only in India but also in other developing countries where generics are exported in large quantities.

The decision was taken by the Union cabinet earlier but notified today by the department of industrial policy & promotion.

The move, analysts said, could allow Indian entrepreneurs to approach overseas firms but valuations could come under strain during takeover talks as MNCs normally insist on “non-compete” clauses. Usually, such non-compete clauses last for five to 10 years.

In 2008, Daiichi paid $4.9 billion for a 63.5 per cent stake in Ranbaxy in an all-cash deal, valuing the company at $8.5 billion, over five times its annual sales of 2007. Abbott had acquired Piramal’s generics business for $3.72 billion.

Recently, US company Mylan valued Agila Specialties at $1.6 billion, about 6.2 times the annual sales.

A suggestion to exempt earlier takeovers and stop fresh buyouts by imposing a 49 per cent cap on existing pharma companies while allowing 100 per cent FDI in greenfield companies was ruled out by the cabinet as this might not have been compatible with WTO norms on cross-border investments.

 
 
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