FEMA Regulations in Pharmaceutical Sector

Sonal Pruthi

24 Dec, 2020

The Indian Pharmaceutical industry of India has been ranked as one of the fair sectors in the world. It is considered the largest supplier of generic drugs across the globe. Our pharmaceutical sector has fulfilled the demands of over and above 50% of global markets for many medicines and vaccines. It is the world third largest w.r.t production by volume and continues to grow.

Relevant Data for the Pharmaceutical Sector

 It is expected that this sector will grow by the 2025 year to USD 100 Billion. Our India consists of companies whose annual turnover is more than 20 billion USD in Pharmaceutical sector, with a domestic turnover of an equivalent amount. The share of global demand can be expressed as – 20% generic medicines (exports share), 11.9% contribution in overall exports, 70%generic drug revenue share, and 21% patented revenue drug share.

The 50 % of the global demand in which 40% generic demand is in the USA and 25 % of all medicines in the U.K.

The upcoming packages, which have been initiated by the government for its growth, given a package of Rs 14,000 cr for setting up bulk drugs and medical devices park.

The government of India (GOI)has started Production linked Incentive scheme for this industry meanwhile, the global demands have been increasing now and then; it is expected that the Indian Pharmaceutical industry is bound to benefit from the rising global demand for vaccines and India’s production capacities will be fully utilized.

Amendment in the Pharmaceutical sector in India

The pharmaceutical sector has attracted a large amount of investment. It has brought massive FDI. This sector has got Overseas Direct Investment.

Before the amendment of the 2015, Finance Act, it was the Central Government who was bound to legislate on the capital account transactions. The new rules like of Foreign Exchange Management (Non-Debt Instrument) Rules, 2019, for acceptance of Foreign Investment or FDI has been legislated. The new rules will supersede the TISPRO (Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) Regulations, 2017).

AS FDI/ FI in India is subjected to various sectoral conditions such as; entry route, sectoral cap, pricing guidelines, and attendant conditionality as specified in Schedule 1 of NDI Rules

FDI in Pharmaceuticals:

The FDI has been allowed 100 percent in pharmaceutical sector. The reason is not COVID-19 but the increasing demand for well-established health infrastructure all over India. The market multiplied for India in covid times, in the pharmaceutical sector.

As given in Schedule 1 of NDI rules, which permitted 100% FDI in pharmaceutical sector^[1] in the industries like Greenfield and Brownfield. The routes are automatic for the Brownfield, which is 74%under the automatic route in FDI, and the rest is under the government route. Whereas in the entry route, it is 100% under Greenfield.

Greenfield is the Production and operational facilitiesin which there is a construction of newfrom the very ground and includes industrial licenses.

 Brownfield means existing and living plants.

The difference between the definition of Brownfield and Greenfield is apt and precise, but there are problems which are visible, requires Government intervention to come out with different viable solutions.

Example-

Consider a case which requires a significant expansion in the current Joint Venture. Where the Indian firm has the limited availability of funds for the development, but Foreign company is  willing to extend its contribution. It will fall in the category of Brownfield, but one has the option to work around the model of Special purpose vehicle to avoid government approval routes.

What Conditions apply to Brownfield and Greenfield Sectors?

Greenfield –

• Non-competition section

According to this clause, under exceptional/particular circumstances with government permission, it will be allowed.

• Complete list of agreements

Here Certificate to be submitted by the prospective investor & investee furnishing the complete list of agreements which have been entered into—thereby attaching the copies thereof.

Brownfield-

After obtaining approval under Brownfield, the government may incorporate and impose the necessary conditions for FDI:

• Maintenance of Production and supply of essential medicines and drugs

According to NLEM (National List Of Essential Medicines), there is a need to maintain the Production and Supply of Essential Medicines and Drugs given in NLEM. Their production levels and supply to be kept in the domestic market for the next five years at an absolute quantitative level.

• Maintaining Benchmark

There is necessity to maintain the Benchmark for this level higher levels of three years production of NLEM drugs in the last three financial years, before the coming of induction of Foreign Investment/ Foreign Direct Investment.

• Control of  R & D Expenditure:

It is necessary to maintain the research and development expenses for the five years, in value terms, at an absolute quantitative level. The Benchmark that any of last three financial years immediately, would be the highest level of R&D expenses incurred, before the year of Foreign Investment.

• Transmission of Technology

A piece of complete information and foreign investment, in case of transfer of technology, to be provided to Administrative Ministry.

Administrative Ministry is-

• Ministry of Health and Family Welfare,
• Department of Pharmaceuticals or any other regulatory Agency/Development
•  as notified by Central Government from time to time,
• Which monitors the compliances

Read our article:Significance of Foreign Direct Investment under the Approval Route

Where Government Approval is necessary irrespective of its being under government approval in FDI?

1. It is case where the land borders by our entities in India are shared by with that other countries
2. the Beneficial owner who is either situated in that country or is a Citizen of that country which shares a land border with India

Where, FDI is received from the companies who are;

• incorporated/persons living in/citizens of Afghanistan, Pakistan, Bangladesh, Nepal, Bhutan, Myanmar, and China, 
• Are to be subject to government approval (NDI amendment rules 2020).

There are approximately 10 schedules under NDI rules. Schedule 1 consist of FDI. The schedule 1 and others are different from each other that is, each foreign investment would be under different limits.

FDI in Manufacturing of Medical Devices

There is 100% FDI under medical devices permissible, which is subject to the automatic route is for Medical Devices

Medical device means

Any instrument includes;

• the apparatus, appliance, implant, material, or another article (whether used alone or in combination)
• that consists of the software, to be used for human/animals for below purposes,
• but does not achieve its primary intended action in or on the human body or animals by any pharmacological or immunological or metabolic means,
•  but which may be assisted in its intended function by such means
• It has the setup of Diagnosis, prevention, monitoring, treatment or alleviation of any disease or disorder;
• It also has Diagnosis, monitoring, treatment, alleviation of, or assistance for, any injury or disability;
• It helps in the investigation, replacement or modification or support of the anatomy or of a physiological process;
• It also supporting or sustaining life;
• It provides disinfection of medical devices;
• It also helps in the control of conception;

Conclusion

Read our article:The Significance of Foreign Exchange Market