Easier funding for pharma expansion projects

Foreign direct investment (FDI) of up to 74 per cent in the pharmaceutical sector can come via the automatic approval route for brownfield (or expansion) projects.

FDI more than this limit would need government approval, the government said on Monday. Brownfield projects refer to development of existing infrastructure, while greenfield ones refer to new developments.

Indian companies already have the freedom to get 100 per cent FDI for greenfield expansion. Till date, if an Indian company wanted to get any FDI for expansion of existing projects, it needed to get an approval from the Foreign Investment Promotion Board (FIPB) of the finance ministry.

“While we will have to wait for the actual press note to see the details, this is a welcome change, reversing in part the requirement for government approval for brownfield investments in the pharma sector. For private companies, this will allow promoters to monetise a part of their shareholding easily should they choose to do so. The FIPB process used to only add to timelines,” said Rajat Mukherjee, partner, Khaitan & Co. A sticky issue for merger and acquisition (M&A) deals has been the non-compete clause usually part of such investments. Such clauses are not permitted without FIPB approval.

“The press release is silent on this, but one would hope that every aspect of the deal, including non-compete clauses, should be under the automatic route, so long as the investment is 74 per cent or below,” Mukherjee added. The government has capped this automatic FDI for brownfield investments at 74 per cent.

“In cases where the quantum is more than 74 per cent, the government should indicate a broad evaluation criteria,” said Utkarsh Palnitkar, partner and head, Life Sciences Practice, KPMG in India. “Whether a company is 100 per cent foreign-owned or partially foreign-owned, applicability of relevant legislation is universal. The government could be concerned about exits from certain therapeutic segments post acquisition for which it could stipulate commensurate conditions.”