BY INVITATION. FIPB abolition is regressive

The government’s decision to abolish the Foreign Investment Promotion Board (FIPB) is being projected as a move to enhance efficiency in decision-making on foreign direct investment (FDI). Although there are doubts about the FIPB’s effectiveness, this inter-ministerial body coordinated by the Department of Economic Affairs provided a forum to assess the implications of FDI in a holistic manner.

Once the FIPB is abolished, decisions will be taken by the line ministry with the concurrence of the Department of Industrial Policy and Promotion. This new arrangement effectively eliminates the ability of the Health Ministry to impose additional conditions in the case of FDI in brownfield or existing pharmaceutical companies, thereby seriously undermining India’s ability to ensure availability of affordable medicines and vaccines.

In 2001, the ‘FDI at any cost’ approach resulted from a policy allowing 100 per cent FDI in the pharmaceutical sector through the automatic route without any distinction between greenfield and brownfield investments. A section of the industry, which uses recombined DNA technology, was exempt from this automatic route. Transnational pharmaceutical majors used the policy’s failure to distinguish between brownfield and greenfield investments to buy out major Indian companies. The case of Ranbaxy and Nicholas Piramal’s domestic formulations business in the period after the introduction of product patent protection in 2005 was illustrative.

These acquisitions, followed by many others, challenged the self-sufficiency and availability of affordable medicines and vaccines. Further, such acquisitions also undermined the ability to use flexibilities in the Indian Patents Act to curb patent monopoly and to ensure availability of new medicines at affordable cost. If the control of technologically advanced pharma companies were vested with such transnational companies, there would be little chance to use flexibilities such as the compulsory licence.

These concerns resulted in the revision of the 2001 policy. In 2012, the government introduced a 49 per cent cap on the automatic route on brownfield investment in pharma. It also framed a few conditions to obtain FIPB approval in case of brownfield investments above 49 per cent. In fact, the Standing Committee of Commerce stated: “The Committee feels that introduction of FIPB approval mechanism was a feeble attempt which would not be able to measure up to the challenges posed by this route.” It recommended the prohibition of brownfield FDI in pharma.

However, in June 2016, the government ignored these concerns expressed by the Standing Committee and hiked the limit on brownfield FDI for the automatic route from 49 per cent to 74 per cent with two additional conditions. First, allow the non-competition clause in exceptional circumstances with the approval of the FIPB, that is, the agreement prohibiting the promoter of the Indian company from setting up another pharmaceutical company. Second, it reserved the government’s right to add appropriate conditions for brownfield FDI at the time of approval.

These additional conditions were redundant because of the permission for 74 per cent brownfield FDI through the automatic route. A brownfield investor does not need 100 per cent shareholding to seize management control. And having seized management control, it did not need to obtain FIPB approval.

The abolition of the FIPB now fully dilutes the limited safety catches put in place in case brownfield investments crossed 74 per cent in pharma.

The government can incorporate appropriate conditions for brownfield FDI investment above 74 per cent at the time of granting approval by the FIPB. But after the abolition of FIPB, the task of imposing appropriate conditions falls on the Department of Pharmaceuticals.

Historically, this department favoured the policy of ‘FDI at any cost’, which in a sense undermined health security. The Health Ministry, which is the appropriate ministry to assess the impact of such acquisitions, would not be in a position to address the issue. In short, the enhancement of cap on brownfield investment in 2016 as well as the elimination of the FIPB has removed all restrictions on brownfield FDI, which seriously undermines the government's ability to ensure access to affordable medicines and the right to health.

The writer is a researcher on access to medicine with Third World Network. Views expressed are personal.

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