India: The Full Spectrum On FDI In Brownfield Companies

By DG Shah

Acquisition of brownfield, or existing, pharmaceutical companies may be seen in different perspectives as greenfield, or new, projects are permitted 100% equity via the automatic route. India has sought FDI mainly to bridge the shortfall in investment or to facilitate the flow of know-how and technology. We must first assess the need of the pharma sector and then evaluate whether mere change of ownership would meet its needs.

Domestic companies invested Rs 54,000 crore in gross fixed assets between 1995 and 2010. They have modernised manufacturing to meet stringent regulatory requirements of the developed world. Thus, the sector did not face dearth of investment. What they lack is technical know-how for discovery research and developing efficient global clinical trial protocols. But brownfield investments will not fulfil this gap. If so, should India not channelise FDI in areas that fill in these gaps? India did it in the 1980s for production of bulk drugs. China did it in the 1990s for investment in R&D. Russia is doing it currently to set up local production.

India has the option to channelise FDI in the field of its choice, if only one were not to underestimate the huge potential of its market. Is it then necessary to offer the brownfield carrot to attract investment in the greenfield? Will investment in the brownfield eventually lead to investment in greenfield or taper off with the acquisition of existing companies? Will choking brownfield divert investment to greenfield? These are questions policymakers need to seek answers to.

The perspectives of four diverse stakeholders — the promoter, industry, patient and public health — on brownfield investment are presented below: A promoter wants the best possible valuation, irrespective of consequences on society. He believes he has single-handedly built the company and, so, has the right to sell to whosoever gives him the best return. One may ask if patients, health infrastructure and the policy supporting indigenous producers had any role in his success.

The industry has many views. Foreign companies, both brands and generics, are eager for a ready-to-eat meal without any barriers. The former is looking for a sizeable share of the domestic market to strengthen the distribution network for high-priced imported products. The latter is eyeing the low-cost manufacturing base to service lucrative overseas markets. Domestic companies have different considerations that keep changing according to their current standing and strategic plans.

For instance, a company looking for acquisitions abroad, with a view to stave off similar barriers overseas; a company wanting to project a liberal image, with a view to impress an alliance partner; a company wanting to maintain its rank in the domestic market to discourage competitors from the inorganic growth; and a company wanting to eliminate lower priced competitors — these commercial considerations weigh in their supporting brownfield acquisitions.

On the other hand, companies looking for inorganic growth want some restrictions to get the valuations right. It is pertinent to note that a foreign company is able to borrow at 1% to leverage the buyout, whereas a domestic company ends up paying 12 times more. Thus, the dice is loaded against mergers and acquisitions within the domestic sector.

The patient is not concerned about ownership, as long as he is assured of uninterrupted supply of quality medicines at affordable prices. But who can assure him of sustained supply if the company is acquired by a foreign entity, protected by multilateral/bilateral trade agreements, and wants to serve only rich countries? Public health is a major concern for activists. They want medicine security.

The commerce minister deserves credit for his foresight on this issue. Activists maintain the promoters’ right to wealth cannot be equated with the right to life enshrined in the Constitution. They have little respect for companies supporting brownfield acquisitions for private commercial interests.

They wonder if the pharmaceutical sector is less sensitive than insurance, banking, media, aviation, etc, where FDI is capped.

The role of policymakers is to balance these conflicting interests and evolve a policy to serve only long-term national interests.

DG Shah is secretary general of the Indian Pharmaceutical Alliance.

Source: This article was first published in The Economic Times of India, here. Reprinted with permission.