india has decided not to go ahead with a proposal that sought to prevent foreigners from owning a majority stake in domestic makers of “rare and critical” drugs

India Backs Off on Restricting Foreign Pharmaceutical Investment

Commerce Minister Says Not Going Ahead With Proposal

RAJESH ROY And KENAN MACHADO

Updated Nov. 29, 2013 10:42 a.m. ET

NEW DELHI–India has decided not to go ahead with a proposal that sought to prevent foreigners from owning a majority stake in domestic makers of “rare and critical” drugs, the commerce minister said Friday. A government agency had proposed to ensure the supply of cheap generic drugs locally by limiting the percentage of ownership that a foreign investor could hold.But the government backed down after India’s finance ministry raised concerns that such a law would discourage foreign investment in the country’s economy, which is struggling with slowing growth, senior finance ministry officials told The Wall Street Journal.

After several purchases by foreign drug-makers of Indian companies in recent years, politicians had raised concerns that foreign ownership would result in companies focusing on making expensive patented medicines instead of cheap drugs vital to treating India’s devastating diseases. But weighed against this concern was the reality of India’s slowing economy and decreased foreign investment, which would likely have suffered even further with the new regulations.

“It’s a big positive,” Kapil Bhatia, head of the healthcare practice at Mumbai-based investment bank Systematix Capital Services Private Limited, said of the government’s decision to back off foreign restrictions. “India is a big enough market for multinational companies coming in as investors.”

The group of senior ministers considering the government agency’s proposal Thursday night decided against a key provision that would have prevented foreigners from owning more than 49% of existing Indian manufacturers of certain critical drugs, Minister of Commerce & Industry Anand Sharma said. The critical drugs would have likely included medicines for the treatment of cancer, tuberculosis, malaria, AIDS and certain other diseases.

Foreigners can currently own up to 100% in Indian drug makers. The Ministry of Health & Family Welfare would have decided which drugs would be considered “rare and critical,” their manufacturers subjected to the restrictions on foreign ownership.

India’s Prime Minister Manmohan Singh earlier this year had ordered his government to reconsider unrestricted foreign ownership in the aftermath of the many acquisitions.

In addition to restricting foreign investment, the proposal rejected Thursday night would also have required foreign investors to set aside 25% of their investments within the first three years to build new plants or research centers. The investors would also have been barred from selling factories and research and development facilities.

D.G. Shah, secretary-general of the Indian Pharmaceutical Alliance, a lobby group for drug makers, decried the government’s lost opportunity. If the regulations were imposed, he said, they would have forced foreign investors to put considerable resources into building factories and research labs in India.

Investment bankers say some Indian owners of generic drug-making companies have been eager to sell out because their businesses are struggling with low margins in the deeply competitive industry. Also, they took big loans to expand and are struggling to repay them, the bankers say.

The proposal was based on a government study that showed low foreign investment in building drug manufacturing facilities and a domestic industry that could easily become dominated by foreign players, a senior government official who reviewed the study said. If India’s top three drug makers were acquired by foreign companies, the share of India’s drug market controlled by foreigners would increase to 41% from about 25%, the official said.