While FDI in wholesale trading is permitted under the existing policy (cash-and-carry business), there is no separate window for such investments in the regulations for the pharma sector. This creates confusion and investment by foreign investors in an Indian entity engaged in pharma manufacturing and wholesale trading is practically not allowed by DIPP.
While FDI could flow into wholesale business under the regulations for trading activities, this has to conform to stringent entry norms.
"For pharma firms to make brownfield investments in the country, there is a need to simplify and broaden the scope of FDI regulations by specifying that if they want to do both manufacturing and wholesale trade, then the curbs on cash-and-carry trade don't apply in their case," said a government official privy to the development.
The changes could come with riders such as full disclosure of beneficial owners of the investment and the source of investment. This would prevent backdoor entry of full-fledged wholesellers in domestic pharma business. The intent of the government is to allow only pharma firms to explore this new business.
Under the FDI policy for pharma sector, which was debated for a while in government circles amid fears of the Indian drug industry being hit by an acquisition bid from foreign firms, it is specified that 100% FDI is allowed under automatic route for greenfield investment and 100% FDI is allowed in brownfield investment but after getting clearances from the Foreign Investment Promotion Board (FIPB). It does not specify what all activities would be covered under the head `pharmaceuticals' but trade generally treats it as an investment in drug manufacturing and marketing.
The change is being considered in wake of a demand from certain sections of the industry that have faced problems on getting their proposals cleared by the FIPB.
Several FDI applications from domestic phama firms, engaged in manufacturing as well as wholesale trading, have so far been rejected or deferred by FIPB.
Wholesale trading refers to sale for the purpose of trade, business and profession as opposed to sales for the purpose of personal consumption and includes resale, processing and thereafter sale, bulk imports and B2B e-commerce.
Under this route, phama companies can sell branded and generic drugs of other companies.
The yardstick to determine whether the sale is wholesale or not would be the type of customers to whom the sale is made and not the size and volume of sales, said another government official.
While allowing new window of wholesale trade in pharma, the DIPP is unlikely to permit similar relaxation for retail activity in the sector.
Regulations for B2C activity will continue to be governed by the policy on investment in the multi-brand segment where 51% FDI is permitted. This is being done as retail is a separate, strong segment globally with specialised players.