Cabinet may review FDI rules on Monday

Measures have been proposed for tightening FDI in existing domestic pharmaceutical companies

The Cabinet is likely to meet on Monday to take  up two important proposals on foreign direct investment (FDI), in the realty sector and the pharmaceutical industry.

As multinational companies (MNCs) make a beeline to acquire Indian pharma firms, the Cabinet will consider a proposal by the commerce and industry ministry to tighten the FDI policy for the sector.

The proposal would incorporating conditions such as mandatory investment in research and development (R&D) and a non-compete clause in the shareholders pact.

The proposal asks that a foreign company not be allowed to close an existing R&D centre and to mandatorily invest up to 25 per cent of the FDI in the new unit or an R& D facility. The total investment would have to be within three years of the acquisition.   

The proposal also  moots reducing the FDI cap to 49 per cent in rare or critical pharma segments.There is a feeling in government circles that with MNCs taking control of Indian firms, there could be a reduction in supply of vaccines and injectables, particularly for cancer and active pharmaceutical ingredients.

A parliamentary committee recently suggested a blanket ban on FDI in pharma, saying policy for the sector should be dictated by the public good. Currently, the government permits 100 per cent FDI in pharma through the automatic approval route in new projects but only after approval of the Foreign Investment Promotion Board in existing companies.

FDI in the pharma sector had more than doubled over a year to $1.07 billion during the April-August period.

The cabinet might also decide on relaxing the riders for FDI in the construction development sector. The move comes as FDI in the realty sector declined 57 per cent in 2012-13 over a year before. At present, 100 per cent FDI is permitted thorugh the automatic route in real estate. The sector has been defined to include townships, housing, commercial premises, hotels, resorts, hospitals, educational institutions, recreational facilities, city and regional built-up infrastructure.

The proposal, from the department of industrial policy and promotion, has sought to ease the conditions for exit of foreign entitities before the present three-year lock-in. They could, it is proposed, exit on receipt of the occupancy or completion certificate issued by the competent local authority or by sale to another non-resident investor, subject to a lock-in of three years from the date of the purchase by the other foreign investor.

However, the transfer from one foreigner to another will be permissible only once, with no possibility of waiver of the fresh lock-in period.  

The proposal also seeks to reduce the stipulated minimum to be built to a carpet area of 20,000 sq metres in all class-1 cities (population of more than 100,000), against the present criterion of 50,000 sq metres of built-up area. Carpet area, goes the argument, can be more objectively measured.