DIPP seeks curbs as UPA-II clears over 49% FII stake in pharma sector

The Department of Industrial Policy and Promotion (DIPP) has proposed curbs on portfolio investments in the pharmaceutical sector after the UPA government early last month cleared over 49 per cent investment in a brown field acquisition.

The department is now reported to have suggested the Foreign Investment Promotion Board (FIPB) route for foreign institutional investment in listed pharmaceuticals companies beyond the 24 per cent threshold.

Current rules limit portfolio investments in listed companies at 24 per cent, but the limit can be raised to the sectoral FDI limit through a board resolution and special resolution of shareholders. Individual portfolio investors can hold up to 10 per cent in a company.

Companies do not have to come to the FIPB in case the sector is on the automatic route.

However, the union cabinet, at its final meet under the UPA II rule last month (14 May), cleared a $400-million foreign investment proposal by buyout fund KKR, marking an end to the wrangling over the issue of allowing FDI in the area of brownfield pharma.

The move is significant as it is the first major brownfield pharma investment proposal entailing foreign investment higher than the 49 per cent mark.

The deal, a two-part transaction, is a combination of fresh equity infusion and a buyout of Evolvance India Life Science Fund (EILSF), which invested $30 million in Gland Pharma in 2008.

While KKR proposed to buy a 37.98 per cent stake in Hyderabad-based Gland Pharma, which develops and manufactures generic injectables primarily in the cardiovascular and orthopaedic segment, the transaction would also involve 29.4 per cent share purchase in Gland Celsus Bio Chemicals from an existing investor. The UPA-II cabinet had cleared both the proposals.

This was the last decision taken by the UPA-II regarding FDI and was referred by the Foreign Investment Promotion Board (FIPB) to the Cabinet Committee on Economic Affairs (CCEA) in February. The proposal, according to sources, had caused some unease in the DIPP, as it had certain non-compete clause, something which is not allowed in brownfield pharma projects.

KKR, Gland Pharma and Gland Celsus had entered into the share purchase agreements on 27 November last year. KKR had also entered into a shareholders' agreement with the promoters of Gland Pharma and Evolvance India Life Science Fund (EILSF), which invested $30 million in Gland Pharma in 2008.

India allows 100 per cent FDI in pharma sector through automatic approval route in the new projects, but foreign investment in the existing companies are allowed only through the FIPB approval.

In the case of pharma, the DIPP wants the FII investment on automatic route be restricted to 24 per cent. For any further increase in FII limit, companies will have to come to FIPB.

While the FDI policy for the sector says foreign direct investment in existing Indian pharma companies (brownfield investment) would require FIPB nod, the limit, however, remains at 100 per cent.

The finance ministry, however, favours a more liberal approach as portfolio investors cannot take over the management, unlike in the case of FDI.

India had opened its pharmaceutical sector to 100 per cent FDI via the automatic route in 2002, but the UPA government introduced a distinction between greenfield projects and brownfield ones following fears that Indians will be denied cheap medicines if multinational continued to buy big domestic companies.