India is a major player in the global pharmaceuticals industry, with a 20 percent share in generic drugs by volume. The Indian pharmaceutical sector supplies over 50% of the world's demand for vaccines. It also provides 40% of the generic drugs demanded in the United States and 25% of the total drugs sold in the United Kingdom. The liberalization of trade, and the relaxed government policies have allowed this sector to receive seamless funding from foreign clients. The Foreign Exchange Management Act, or FEMA, plays a key role in this respect. It is a legal framework which keeps an eye on the foreign exchange market. FEMA also has specific regulations for FDI aimed at Indian companies. This blog will explore FEMA compliances in the Pharmaceutical Sector.
A brief overview of the Pharmaceutical Industry in India
The Pharma industry is expected to grow by USD 100 billion in 2025. Twenty billion dollars is the total export turnover of the pharma industry. The total annual export turnover of all companies in the pharma sector is 20 billion USD.
Sector also achieved the same valuation when it comes to domestic annual turnover. The Indian government announced a package of Rs 14,000 crore for the establishment a bulk drugs & medical device park last year.
Production linked Incentive Scheme is an attempt by the government to leverage the production capabilities of this sector.
The Indian Pharma Sector will likely experience massive growth over the next few years due to the increasing global demand for vaccines.
This sector, with its ever-growing footprint on the global market, and advanced production capabilities has been able to attract significant foreign direct investments in recent years.
The sector has made efforts to expand its reach beyond the domestic market, by leveraging Overseas Direct Investments (ODI).
Let’s review some basic FEMA provisions relating to FDI and ODI in the Pharmaceuticals Sector.
Modifications in the pharmaceutical sector in India
Indian Pharma has attracted a large amount of FDI and has also made a considerable effort to attract Overseas Direct Investment.
According to the Finance Act 2015[1], India has the right to legislate on Capital Account Transactions.
The Department of Economic, under the Ministry of Finance, has issued Foreign Exchange Management Non-debt instrument Rules (NDI Rules) to secure Foreign Investment/Foreign Direct Investment.
The NDI Rules replaced the Foreign Exchange Management Regulations (Transfer or Issuance of Securities by a Person Resident Outside India), 2017, also known as TISPRO.
The following parameters are used to determine the legality of FDI in India.
Foreign Direct Investments in Pharmaceuticals
According to Schedule 1 of the NDI Rules Government allows 100% FDI both for Greenfield and Brownfield investments in the pharma industry. Greenfield investment can be entered via the automatic route at 100%. In the case of Brownfield investments, the maximum quantum under the automatic route is 74%. Any amount above that will be subject to the applicable laws and regulations.
Key Points to Ponder
FDI can be divided into two categories: greenfield and brownfield investment.
Greenfield investment is when a company constructs its new facility in the host country.
In Brownfield investment, on the other hand, the company purchases or leases established facilities.
Conditions apply to the Brownfield & Greenfield investments
Non-compete clause would be permitted only under specific scenarios with government approval.
Certificate, in a predetermined format, to be submitted by prospective investor and investee rendering thorough detail of agreements drafted and attaching the copies thereof.
Conditions for the Brownfield investment
The government may, while rendering consent for Brownfield, impose suitable conditions for foreign direct investment in such cases.
Maintenance of Production as well as supply of NLEM Drugs (National List of Essential Medicines): The production level of such medicines and their supply to the local market ought to be managed over the next five years at an absolute quantitative level. Benchmark for such level would be the highest level of annual Production for such drugs in the last three years, before the orientation of overseas investment.
Maintenance pertaining to R&D expenditures: From a value standpoint, it must be maintained for five years at an absolute quantitative level. The benchmark in this context would be the highest level of Research and Development expenses that came to light on any of the last three financial years promptly preceding the year of Foreign investment
In the event of technology transfer, entire information along with the orientation of overseas funding to be submitted to the Administrative Ministry.
Department of Pharmaceuticals, Ministry of Health & Family Welfare, or any other regulators as notified by Central Government, shall administer the compliance of conditionalities.
FDI from below, regardless of sector, would need to avail government permission:
Any establishment of the country which is in close proximity to the Indian Border or
Beneficial owners belong to the nation which shares a land border with India.
Therefore, foreign Direct Investment from the entities of the neighbouring countries such as Pakistan, Nepal, Afghanistan, China, and Myanmar would be subject to government permission (NDI rules, 2020).
NDI rule entails schedules for overseas investment. Schedule 1 talk about the FDI. Each schedule renders distinctive legal treatment to the foreign investment as per the conditions and limits mentioned therein. Investment for foreign nationals, on a non-repatriation basis under schedule, shall receive legal treatment at par with Domestic Investment and henceforth not deemed as an overseas investment.
Equity Instruments to Person Resident outside India (PROI): It ought to be issued within sixty days from the date of consideration's receipt, failing which consideration must be sent back to PROI within 15 days from the completion date of sixty days. Such transaction must be conducted via banking modes or by credit to his NRE/ FCNR (B) account.
Conditions relating to Pricing
Listed Company: Price outlined pursuant to the guidelines of SEBI.
Un-listed Company: In view of any globally-acknowledged pricing methodology for valuation on an arm's length basis approved by the CA or a SEBI-certified Merchant Banker or a practising Cost Accountant.
Payment mode for equity instrument & the reporting norms is regulated by the Foreign Exchange Management (Mode of Payment and Reporting of Non-debt Instruments) Regulations 2019, underpinned by the Reserve Bank.
Conditions relating to Reporting
Form Foreign Currency - Gross Provisional Return (FC-GPR): An Indian-based organization granting equity instruments to PROI, under FDI must share such concern in form FC-GPR, within thirty days from the issuance date of the equity instruments.
Annual Return on Foreign Liabilities and Assets (FLA): An Indian-based organization, which has received overseas funding or an LLP which has secured Foreign Investment, shall furnish form, viz FLA to reserve bank by 15th duly of each year.
Foreign Currency - Transfer of Shares (FC-TRS): to be filed for equity instruments' transfer in pursuant to NDI rules, between:
PROI having equity instruments in an Indian-based entity on a repatriable basis or otherwise.
PROI having equity instruments in an Indian-based entity on a repatriable basis & PRI accountability is on resident transferor/transferee, or PROI have
PROI holding equity instruments in an Indian company on a repatriable basis and PROI holding equity instruments on a non-repatriable basis; and
PROI holding equity instruments in an Indian company on a repatriable basis and PRI equity instruments on a non-repatriable basis. Transfers of Equity Instrument of an Indian-based entity by/to PROI are regulated by Rule 9 &13 of NDI Rules.
Form LLP (I): Entity functioning as an LLP getting amount towards the acquisition of profit shares/ capital contribution from PROI, must file Form LLP (I), within 30 days period from the receipt of consideration.
Form LLP (II): On transfer of capital contribution/disinvestment//profit share between PRI & PROI from Form LLP (III) ought to be filed within 60 days from the receipt of funds. The obligation of reporting is on the resident transferee/ transferor
Conclusion
Government allows 100% Foreign Direct investment in the pharma sector via Brownfield and Greenfield investment. The entry route for Greenfield-based funding is 100% under the automatic route. Meanwhile, for Brownfield investment, this quantum is 74% under the automatic route. The applicable laws and regulations will come into play if the amount of investment surpassed such a limit. How ASC Helps in FEMA & RBI Compliance
FEMA prescribes certain compliances in the form of reporting by any person who undertakes transactions defined under FEMA Compliance. Such compliances include foreign liabilities and assets return (FLA Return), annual performance report, Form FC_GPR, etc.
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