Updated on 7 September 2012
Has there been a negative impact on foreign direct investment (FDI) in lifesciences because of the negative credit rating and government flip-flops on FDI?
In August, India's foreign investment approval authority cleared eight pending proposals of foreign drug companies to buy stakes in local companies, which were pending for several months due to lack of clarity on the new FDI norms in the pharmaceuticals sector.
As per the decision from an inter-minsterial group on FDI in pharma, India allows 100 percent FDI in greenfield projects and 49 percent in brownfield projects by the automatic route, while above 49 percent in brownfield requires approval from the FIPB. The group has also decided that a multinational firm buying a stake higher than 49 percent in an Indian pharma company will maintain the same level of investment in research activities and production of essential medicines for five years.
According to some officials, the foreign partner that will gain substantial shareholding in the company will have to assure the government that none of the essential drugs produced by the Indian company will be discontinued after foreign investment. They may also be asked to invest five percent of their turnover in R&D relating to drug that address India specific health problems.
Globally, several countries look at India for providing affordable healthcare and it's even more important to do so for Indian citizens. The government reserves its right to take decisions that are most favorable to its citizens. From this perspective, greenfield projects may be more beneficial to India, given its potential to create new jobs and an ecosystem around it rather than brownfield projects. Even within the proposed brownfield, its important to look at the motive behind the move, especially if it adversely affects country's prospects in the long term by killing competition and increasing prices. Given the significance, the Prime Minister himself is directly involved in this area.
A recent report published in Grant Thornton and cited in HBL indicates that the total PE investments in pharma, healthcare and biotech together increased by a whopping 89 percent; the number of deals jumped from about nine in the first half of 2011 to 17 during the first half of 2012. This was the third sector with such positive change, next only to IT, IT enabled services (227 percent), and banking and financial services (178 percent). Hence, the ratings don't seem to seriously impact the investments.