PMO, finmin differ over brownfield pharma FDI

Written by Soma Das | Timsy Jaipuria | New Delhi | Updated: Jun 4 2012, 05:51am hrs
The row over the foreign direct investment (FDI) policy for the pharmaceutical sector refuses to die down. Ministries have again locked horns over who will regulate brownfield foreign investment in the sector, forcing the Prime Ministers Office to advise a group of ministers (GoM) looking at the issue not to deviate from the earlier decision that the Competition Commission of India (CCI) will vet these cross-border deals. The finance ministry wanted to be represented in the GoM as it felt that the Foreign Investment Promotion Board (FIPB), not the CCI, is the right regulator for FDI.

The need to regulate foreign investments in Indian pharma companies was felt because sections of the domestic industry and public health groups saw a trend of Indian drug companies being taken over by multinationals, which they feared could lead to the crippling of the domestic industry and flaring up of prices of medicines. After much inter-ministerial deliberations, it was decided last year that the CCI would look at brownfield foreign investment proposals while greenfield investments will be freely allowed in the sector, where 100% FDI is allowed.

This time around, the prickliest matter revolves around whether the FIPB or CCI can be the more suitable filter to vet brownfield acquisitions in the sector compared with the last time when ministries sparred over whether FDI in pharma should be capped/regulated.

Shortly after the GoM was constituted with the department of pharma, ministry of health and ministry of commerce and industry as its members, the department of economic affairs, annoyed at being left out, shot off a letter to the commerce ministry seeking finance minister Pranab Mukherjee's inclusion in the GoM.

Even before this could be sorted out, the PMO wrote to the commerce minister that the fresh GoM shouldnt deviate from what has already been decided. In essence, the PMO sent out a clear message that while the GoM was free to deliberate on the possible ways and means of regulation, it should keep away from discussing whether the CCI is the right agency to do it.

This reduced options for the GoM, which was keen to first debate the question of feasibility of a competition bodys mandate and ability to deal with regulation of FDI in pharma.

This led commerce minister Anand Sharma to write back to the PMO. Admitting that there is a deadlock between various arms of government on the method of regulating FDI in pharma, the minister has now sought a meeting of all ministries concerned to resolve differences with the Prime Minister as the chair.

Both the health and commerce ministries are clear that the CCI cannot be expected to stop a deal strictly and solely on grounds of public health while the FIPB can be sensitised to perform this task. The FIPB during the course of clearing acquisition proposals holds inter-ministerial consultations that would enable both the health ministry and the department of industrial policy and promotion (DIPP) to participate and ensure that any deal with threatening ramifications for public health doesnt get the green signal.

Second, those supporting the FIPB route also argue that the CCI is a regulatory body with an adjudicatory body the Competition Appellate Tribunal above it and, thus, its decisions are prone to being contested in the tribunal and higher courts, which could translate into inordinate delays in clearance of a deal. This would deter investments in long term.

Under the Competition Act, the CCI has powers to regulate M&As (including cross-border ones) that could have an adverse effect on competition in the relevant market. The CCI being a generic regulator of the market, it is debatable if it is worth and tenable to single out a sector for a different treatment, especially considering lack of international precedents.

Moreover, the role of the CCI, according to the health and commerce ministries, can be built in to check on cases of oversight by the FIPB in the pharma sector.

Last year an inter-ministerial group, headed by by Planning Commission member Arun Maira mandated to decide on restricting FDI in the pharma sector, witnessed a near-vertical split among ministries. While half of the panel members from finance ministry, Planning Commission and department of pharmaceuticals, in favour of the status quo, argued against the need to impose any ceiling on FDI in the pharma sector, the other half health ministry, DIPP and ministry of commerce backed by the department of biotechnology were strongly pitching for selective curbs on brownfield acquisitions. Finally, the PMO stepped in to rule that Mairas suggestion of vetting brownfield deals through the CCI should become the norm, and gave the CCI six months to brace up for its new role. Meanwhile, the FIPB was asked to function as the temporary gatekeeper in case of pharma deals. Although it has been over seven months now, the FIPB continues to act as the filter for pharma deals as the CCI's new role wouldn't be possible without amending the Competition Act.