Investor interest remains robust in the e-pharmacy space, even as some reports suggest that in India this industry segment is poised to cross $18 billion in a couple of years.

At the same time, it also faces lingering legal controversy – including whether e-pharmacies are legally permitted at all. It is crucial for a foreign investor to have clarity on the business model and operations of a target e-pharmacy of choice, as well as the applicable regulatory regime.

Debate over regulation

For several years, it has been contended by brick-and-mortar pharmacies and medical practitioners that e-pharmacies or online pharmacies not only fall foul of Indian regulations but also create risks of forged prescriptions and exploitation of prescription drugs for the end customer.

At present, the vexed regulatory issue remains pending on two fronts. First, before the country’s higher judiciary owing to interim orders in matters such as Dr. Zaheer Ahmed Vs Union of India and Practo Technologies Vs Tamil Nadu Chemists and Druggists Association .

Two honourable High Courts took divergent positions on online sale of drugs – the Delhi High Court in the former prohibiting the same, and the Madras High Court in the latter allowing the same till the government brought into effect its rules on e-pharmacies.

Also pending is the formalisation of draft rules governing e-pharmacies, first notified in 2018 and intended to be an amendment to the Drugs and Cosmetics Rules, 1945 (“Rules”) vide insertion of a proposed Part VIB (“Draft Rules”).

Need for licence

There have been debates aplenty on whether e-pharmacies have the same business and operational model as traditional pharmacies.

Indeed, the applicability of a regulatory regime depends on business and operations of an entity. In this context, it may be noted that pending formalisation of the Draft Rules, there is no statutory definition of “e-pharmacy” either under the Drugs and Cosmetics Act, 1940 (“1940 Act”) or the Pharmacy Act, 1948 (“1948 Act”).

As legislations that originated several decades ago, they may not have kept pace with latest technology-based business practices. Interestingly, the 1948 Act has only a definition of “Registered Pharmacist”, allowing for an inference that a pharmacist should not operate without specialised regulatory oversight.

The 1940 Act prescribes inter alia that a person selling, stocking, exhibiting or offering for sale, or distribution, of drugs – himself or by another person on his behalf – would require registration.

Could it thus be argued that under present law, any internet-based platform that sells, stocks or exhibits, or offers for sale or even distribute any drugs, might attract licence requirements (whether it creates its own inventory and supply chain; provides a distribution channel as a service to registered pharmacies as a service; or is simply a marketplace platform for other registered pharmacies)?

The Draft Rules provide two relevant definitions, which are “e-pharmacy” and “e-pharmacy portal” and mandate the registration of e-pharmacies. Once brought into effect, the above clarity would help to settle the debate.

FDI in e-pharmacy

A prospective foreign investor who wishes to undertake foreign direct investment (“FDI”) in the e-pharmacy space (whether present day or after the new regime comes into effect) may consider few aspects to ensure that its investment complies with the extant FDI regulations in India.

It would be important to validate whether the investment is more likely in the “trading” sector rather than the “pharmaceutical” sector. This distinction is important because while technically both spaces allow for one hundred per cent FDI limit, there are nuanced conditions and restrictions in both. If trading, it would likely fall under “e-commerce”. E-commerce itself has two classifications, being “inventory-based model” and “marketplace-based model”.

FDI in inventory-based model is prohibited and the marketplace model has detailed conditions that need to be fulfilled for the FDI to be compliant. Therefore, formulation of a business and legal structure that makes the investment viable would be important.

From an operational perspective, having the Draft Rules become part of the Rules would lend clarity.

Given how the existing regime does not have a blanket prohibition on online sale of drugs but non-compliant online sale of drugs, the licensing/registration regime could be streamlined better in legislation.

This may require not just the e-pharmacy specific insertions from the Draft Rules but also other tweaks in the Rules to exclude e-pharmacy business from the generic registration requirements.

In addition, FDI should take place in a compliant marketplace model of e-pharmacy.

Furthermore, the entity would also have to ensure compliance with few other important compliances such as e-commerce regulations under consumer protection law and data protection regulations.

(The author is a Mumbai-based Corporate Partner with HSA Advocates, and additionally heads the practice for the firm’s Kolkata Office. Views expressed herein are personal and not to be construed as legal advice.)