FDI in Pharma and Non-Compete Clause

According to the prevailing annual Foreign Direct Investment (FDI) in Pharma is allowed up to 100%. While FDI is allowed in greenfield projects under the automatic route, FDI in brownfield projects requires prior Government permission.the Cabinet decided to retain the 100% FDI limit but imposed some restrictions on non-compete clauses.

The non-compete clause is that foreign company and local company cannot produce same product as per previous agreement , but if there is none the local company even if its in JV can start a competition.Unless Foreign Investment Promotion Board (FIPB) approves, non-compete clause cannot be inserted which doesn’t provide much security for Foreign investors. So final authority is with FIPB .

Simplified Financial express article.

The Non-compete clause is an investment agreement restricts either party in a JV or the acquired entity in an acquisition from engaging in a similar business for a mutually-agreed period which, as per market standards, could range between three to seven years, depending upon the profitability of the entity or other business requirements.

the non-compete clause provides reasonable protection to any investor against arbitrary competition from its own JV partner or from the promoter who has recently However, it may not be so important for the pharma industry which is primarily driven by the ownership of patents and other intellectual property rights (IPRs).

In case of a brownfield investment, the Indian promoter/sellers will automatically extinguish their rights in any patent or other IPRs by selling their stake in the Indian drug manufacturing company or the drug business itself. The non-availability of the non-compete clause will only permit the Indian promoter to start a new venture for manufacturing generic drugs, which may not be in direct competition with the foreign investor. Hence, the absence of non-compete clause in the investment agreement will have minimal impact on the decision of the foreign investor for investing in India. For greenfield investments, especially in case of joint ventures, it may be important, but cannot be a guiding factor.

The way the Press Note has been worded, it appears that even in case of a greenfield investment, should there be a non-compete clause, the same may also attract a prior FIPB approval. This is specifically because the words “non-compete clause would not be allowed except in special circumstances with the approval of FIPB” are not linked only to brownfield investments.

Usually, foreign investment related to the setting up of new assets/facilities is referred to as greenfield and the purchasing of existing facilities/assets or assuming ownership of or acquiring stake in an existing company is classified as brownfield investment.

Accordingly, the foreign investment for setting up of new assets/facilities needs to always be treated as greenfield even if it requires additional funding for expansion or otherwise at a later date. Similarly, reorganisation of an existing investment within the group is neither brownfield nor greenfield. However, at present, FIPB approvals are being granted for the above situation classifying them as brownfield investment.

This is a Simplified version of Need to look beyond non-compete clause in Finacial Express.

Leave a Reply