RBI seeks clarity on FII investment in pharmaceutical sector

The Reserve Bank of India (RBI) has sought clarity on whether foreign portfolio investments can be allowed in existing companies without government approval, putting the spotlight back on a sector that has been the subject of much debate and policy change with respect to overseas investment.


The current policy for the pharma sector allows foreign direct investment (FDI) up to 100% through the automatic route in greenfield units, but investment in existing companies needs the approval of the Foreign Investment Promotion Board (FIPB).

The central bank has written to the finance ministry seeking to know the regime for foreign portfolio investment in listed Indian pharmaceutical companies – whether it can be allowed without prior FIPB approval. “The RBI basically wants clarity since there is a new regime in place for the pharma sector,” said a finance ministry official who didn’t want to be named. The ministry has initiated discussions with the Department of Industrial Policy and Promotion (DIPP), which has administrative charge of the FDI policy, to take a final call on the issue.

The distinction between greenfield projects and brownfield ones was introduced last year amid concern that Indians will be denied cheap medicines if multinationals continued to acquire control of local drug firms.

Foreign direct investment in the sector now attracts certain special conditions. These include having to manufacture and make available essential drugs for five years after the acquisition and to increase R&D expenditure by 5% for diseases prevalent in India.

Under the current rules, portfolio investment is allowed up to 24% in a listed company. It can be further raised to the sectoral limit through a board resolution and a special resolution of the shareholders. Individual portfolio investors can hold up to 10% in a company.

Experts do not see the need for FIPB approval for portfolio investments by foreign institutional investors. “FIPB approval requirements and FDI policy conditionalities should not apply to FII investments under the portfolio investment scheme. It would otherwise require specific amendment in FEMA (Foreign Exchange Management Act) regulations,” said Akash Gupt, executive director, PwC.

The RBI wants to play safe on the issue of foreign investment in the sector that has already seen intense debate within the government.

A similar issue about adhering to sectoral conditions had also cropped up with respect to portfolio investment in multi-brand retail. A proposal by Future Retail to raise portfolio investment in the venture was directed by the RBI to FIPB and then to DIPP. It is still pending approval. An official said the issue is expected to get resolved once the Arvind Mayaram panel on aligning the definition of FDI and portfolio investment gives its report.