1. INTRODUCTION
1.1 This report was prepared by Ames Gross and Sunil Patel, Pacific Bridge, Inc. The purpose of the report is to provide an overview of the major aspects of the market, law and policy related to pharmaceuticals in India, as well as law and policy on patents, trademarks, investment and company law. It is not meant to provide legal or commercial advice on which any business or investment commitments may be based.
1.2. The data and other statistics presented in this report have been collected from published sources generally felt to be reliable (newspapers, published research, company data, business magazines) but are not intended to be a substitute for detailed market studies and sales analyses. They are only given to provide “order of magnitude” data.
2. PHARMACEUTICAL INDUSTRY
Country Background
2.1. Major demographic statistics on India are as follows:
• Population : 1 billion (48% female / 52% male)
• Population growth rate: 1.6%
• 58% of population is aged less than 25 years of age, 83% below 45 years
• Over 70% of the population lives in rural areas
• 302 towns account for 65% of the urban population
• The per capita income is estimated at US$400
• The population earning income over US$1000 per annum (the “middle class”) is approximately 150 million people.
Economic policy drivers
2.2 The major features of the country’s economic policy are as below.
• The country has a democratically elected Government,
which is very involved in setting economic policy
• Traditionally (until 1991), the system was heavily
socialist oriented, but with a substantially large private sector
(including several joint venture foreign companies),
operating subject to Government licensing and other controls.
• Liberalization since 1991 has resulted in fewer
controls and licenses and encouragement of foreign
investment in priority areas
• Foreign trade was restricted, and imports of consumer
goods were effectively banned. However, India is now a WTO
member, and quantitative restrictions on consumer goods
imports have been considerably reduced, with free imports
of most goods to be permitted by 2002.
Business Environment
2.3 The market is being opened to foreign investment and products, but with a preference for local manufacture as opposed to imports. There are also tariff barriers for consumer goods and pharmaceuticals, with high excise and sales taxes. In addition, there are certain non-tariff barriers in terms of product standards and cumbersome factory and other licensing procedures, and reservation of some products for a strictly defined “small scale sector.”
Health Care System Profile
2.4 A few particulars of the prevailing health care system are provided below:
• Pharmacies : 150,000 (urban), 150,000 (rural)
• Number of doctors: 500,000
• Number of nurses: 600,000
• Hospitals: 15,000 (55%, Government owned, 45% other)
• Dispensaries and health centers: 180,000 (130,000 are
sub-centers with basic services)
• Hospital beds: 1000,000 (60% Government, 40% other)
• Medical insurance: very limited. Re-imbursement is mainly
from companies/institutions to employees.
• Medical colleges: 126
• Medical graduates: 15,000 per annum
Note: These statistics pertain only to the Western (allopathic) system of medicine. Only 25% of the population has access to or uses such medicine. The rest depend on traditional indigenous medicine, mainly ayurvedic, and unani, as well as homeopathy.
Pharmaceutical Industry Profile
2.5 A current profile of the Indian allopathic pharmaceutical industry, is provided below:
• Size of domestic market (value): US$3 billion
• Per capita annual consumption: US$3
• Number of units in manufacturing: 23,000
(1.2% in formulations, the rest in bulk drugs)
• Number of brands: > 6,500 in 77 therapeutic segments
• Market growth rate (value): 14%
• Imports: 4% of total
• Market share of multinationals
(incorporated in India): 40%
• Market share of Indian companies: 60%
• Indian drug prices are among the lowest in the world
Pharmaceutical and other related regulation
2.7 The major source for pharmaceutical regulation is the Drugs and Cosmetics Act 1940 (DCA), and the Drugs and Cosmetics Rules (DCR) made there under. This legislation applies to the whole of India and all products, whether imported or made in India. The legislation is enforced by the Central Government (Department of Chemicals and Fertilizers, Ministry of Chemicals and Petrochemicals) in New Delhi, which is responsible for overall supervision. The office of the Drug Controller of India (DCI) has prime responsibility. However, at the field level, enforcement is done by the individual State governments through their Food and Drug Administrations. Matters of product approval and standards, clinical trials, introduction of new drugs, and import licenses for new drugs are handled by the DCI. However, the approvals for setting up manufacturing facilities, and obtaining licenses to sell and stock drugs are provided by the State Governments. Price controls are in effect on certain drugs, by virtue of the Drug Prices Control Order 1995 (DPCO) (as amended from time to time), under the Essential Commodities Act. (ECA). Other relevant, but general legislation is administered by Government Ministries in charge of Civil Supplies, Law, Industry, etc.
3. PRODUCT APPROVAL
Definition of “Drug”
3.1 The DCA provides the definition of a “drug.” It is a definition which includes:
“all medicines for internal or external use of human beings or animals, and all substances intended to be used for or in the diagnosis, treatment, mitigation or prevention of any disease or disorder in human beings or animals, including preparations applied on the human body for the purpose of repelling insects like mosquitoes.
such substances (other than food) intended to affect the structure or any function of the human body or intended to be used for the destruction of vermin or insects which cause disease in human beings or animals as may be specified from time to time by the Central Government in the Official Gazette”
The definition of a drug also includes substances intended for use as components of a drug (including empty gelatin capsules) and such medical devices for treatment, mitigation, and diagnosis of disease or disorder in human beings or animals as may be specified from time to time.
Approval Procedures for New Drug
3.2 There is no requirement for any registration of a drug in India. However, there is need for approval from the DCI to import, market, or manufacture a “new drug.” All new drugs (drugs not previously used in India or in use for less than four years) proposed to be introduced must be approved for import or manufacture in India by the DCI. The application for permission to import or manufacture must be accompanied by the appropriate dossier as follows.
Data requirements
3.3 The full set of data to be submitted consists of:
• Introduction: description of drug and therapeutic class
• Clinical and pharmaceutical information
• Animal pharmacology
• Animal toxicology
• Human/ clinical pharmacology (Phase I)
• Exploratory clinical trials (Phase II)
• Confirmatory clinical trials (Phase III)
• Special studies
• Regulatory status in other countries
• Marketing information
3.4 All items above may not be required for all drugs. In case the drug is already approved and marketed abroad, then only Phase III trials may be required in India. Further, such trials would need to be conducted on at least 100 persons spread over 3-4 locations in the country. However, the DCI may agree to dispense with the need for local clinical trials, if it is in the public interest and if it can use the data of trials carried out in other countries. Similarly, the submission of data related to animal toxicology, reproduction studies, teratogenic studies, perinatal studies, mutagenicity and
carcinogenicity may be relaxed or modified in case the drugs are in use overseas for several years and there is adequate published evidence regarding the safety of the drug.
Permission from the DCI has to be obtained to import samples for clinical trials and to carry out the clinical trials in India.
3.5 In case the new drug is a fixed dose combination (FDC) of existing approved active ingredients, and these are merely being combined for convenience and provision of a stable acceptable dosage form and the ingredients are unlikely to have
significant interaction of a pharmacodynamic or pharmacokinetic nature, then no additional animal or human data are generally required and marketing permission may be granted if the FDC has an acceptable rationale. However, if the combination is being done for the first time, and a claim is being made, and/or the combination is likely to result in a significant interaction of a pharmacodynamic or pharmacokinetic nature, then it is treated in the same way as any other new drug.
3.6 The period taken to give approval to a new drug largely depends on whether clinical trials will be required by the Drug Controller. It is not possible to estimate the time, and the law lays down no time limit. However, it can be assumed that after the submission of the full (final) dossier, it may take around three months, though this is only an estimate. The actual time taken depends on the amount and effectiveness of follow-up that is done by the local agent with the concerned authorities.
Product Standards
3.7 No drug can be imported, manufactured, stocked, sold or distributed unless it meets the quality and other standards laid down in the DCA. For instance, for patent or proprietary medicines (medicines not listed in the Indian or other pharmacopoeia), the product should comply with the ingredients displayed in the prescribed manner on the label or container and such other standards as may be prescribed. The DCR contains these standards.
There are general standards for all patent or proprietary medicines, tablets, capsules, liquid orals, injections and ointments. In patent medicines that contain vitamins, the content of active ingredients shall not be less than 90% of the labeled contents (however more than 100% of the labeled contents is allowed). In other cases excluding antibiotics and enzymes, the lower limit is 90%, but the active ingredient cannot exceed 110% of the labeled contents. In case of drugs included in the Indian pharmacopoeia (IP), the drug must comply with the standards of identity, purity and strength specified in the current edition of the IP (or if not specified in the current IP, then in the previous IP), as well as such other standards as may be prescribed. Similar standards apply to drugs not in the IP, but included in the official pharmacopoeia of another country. Standards are also prescribed for other types of drugs such as sera, antigens and other biological products.
3.8 Drugs should not be misbranded, adulterated, or spurious. Misbranded drugs are those that are not properly labeled, or the label makes false or misleading claims, or if damage to a drug is concealed, or if a drug is made to appear of greater therapeutic value than it really is. Adulterated drugs are those that contain any filthy, putrid or decomposed substance, or which has been prepared or packed under unsanitary conditions or contaminated with filth, or it contains any toxic or poisonous substance or contains colors other than those permitted, or if it has been mixed with any substance so as to reduce its quality or strength. Permitted colors for drugs are prescribed by the DCR, and these include certain natural colors, artificial colors, coal tar colors, and aluminum or calcium salts (lakes) of the permitted water soluble colors.
3.9 The Central Government has the power to prohibit the import, manufacture or sale of any drug, including those that are deemed as “irrational drug combinations.” For instance, the import and manufacture of Fenfluramine and dexfenfluramine is prohibited. Similarly, other banned drugs include fixed dose combinations of vitamins with anti-inflammatory agents, tranquilizers or analgesics or tetracycline and vitamin C.
Labeling
3.10 No drug can be sold in India without being appropriately labeled. The label must be printed in indelible ink and must contain the trade name as well as the proper name of the medicine, the net contents in terms of weight, measure, volume, etc. The contents of active ingredients must also be provided in the prescribed manner. The name and address of the manufacturer and the address of the premises where the drug has been manufactured, the batch number, and date of manufacture must be provided, as well as the drug license number under which it is manufactured (if manufactured in India). In the case of certain products (including vitamin products even if in combination with other drugs), the label should bear the date of manufacture, and the date of expiry of potency fixed by the manufacturer and the import license number if the product is imported. As per the Standards of Weights and Measures Act, 1976 (SWM) and the Packaged Commodities Rules, 1977 (PCR) made there under, an imported package (whether of drugs or any other item) also has to bear the name and address of the importer, and the retail price thereof. The SWM also prescribes the size and contents of the principal display panel to be on each container. Under the SWM, there are requirements as to standard contents of packages in certain cases.
3.11 For certain drugs, the period between the date of manufacture and the date of expiry of potency is laid down. In addition, for certain drugs the pack sizes have also been specified.
3.12 Certain drugs have to be sold under medical prescription only, and these have to be labeled accordingly along with the schedule of the DCA under which they are classified. Certain other drugs have to be labeled as having to be used under medical supervision.
4. MANUFACTURING
License to Manufacture Drugs
4.1 All manufacturing of drugs in India requires a license. Manufacturing is defined by the DCA as including any process or part of a process for making, altering, ornamenting, finishing, packing, labeling, breaking up or otherwise treating or adopting any drug with a view to its sale or distribution. It does not include dispensing or packing at the retail sale level. A license is required for each such location at which drugs are to be manufactured, and also for each drug to be manufactured. The license has to be renewed periodically. It is also possible to obtain a license to manufacture a product in the factory premises owned by another party, a practice called “loan licensing.”
4.2 The good manufacturing practices and requirements of premises, plant and machinery are provided in the DCR. The items covered are: locations and surroundings, buildings, water supply, disposal of waste, requirements for sterile products manufacturing areas (areas, access, surfaces), working space and storage areas, health clothing and sanitation of workers, medical services, equipment standards. The DCR also specifies rules for maintenance of raw materials and records, master formula records, and batch manufacturing records. Manufacturing operations and controls are also specified, including general controls, precautions against contamination and mix-up, reprocessing and recovery, product containers and closures, labels and other printed materials. Distribution records and records of complaints and adverse reactions are also necessary. Requirements for the quality control system are also provided, including the functions of the quality control department.
4.3 With respect to plant and machinery, the DCR provides for recommended equipment for all product forms including syrups, elixirs, pills, compressed tablets, capsules as well as repacking installations.
4.4 The DCA also specifies other conditions for the grant or renewal of a license: competent technical staff including a pharmacy/pharmaceutical chemistry/science/chemical engineer/chemical technologist/equivalent foreign qualification with experience in drug manufacture, requirements of the testing laboratory and qualifications of the head of the testing unit. The applicant must also show (in case of patent or proprietary medicines), that the medicines contain the constituent ingredients in the therapeutic/ prophylactic quantities as determined in relation to the claims or conditions for which the medicines are to be used, that the medicines are safe for use in the context of the vehicles, excipients, additives and pharmaceutical aids used in the formulation, are stable in the conditions of storage recommended, and contain such ingredients and in such quantities for which there is therapeutic justification.
Industrial Licensing
4.5 Besides the drug manufacturing license as above, for certain drugs there is need for a manufacturing license from the Central Government, in accordance with the Drug Policy and the Industrial Policy. The legal basis for this is the Industries (Development & Regulation) Act, 1956 (IDR). However, the list of such drugs has been reduced substantially and the only drugs now requiring a license are: those involving use of recombinant DNA technology, those involving use of nucleic acids as the active principles and formulations based on use of specific cells/ tissue - targeted formulations. The applicant in these cases has to apply for an industrial license. If the application is in order, the applicant is granted a Letter of Intent (LOI) which is an in principle approval, subject to setting up the factory within a specified period. Once the factory is established to the satisfaction of the authorities, the LOI is converted into an Industrial Licence (IL). The IL will specify various conditions, including the annual capacity up to which the unit can manufacture the licensed item. All other manufacturing units have only to file an Industrial Entrepreneur’s Memorandum (IEM) with details of the proposed items to be manufactured, the capacity, the location, the source of technology, the raw material requirement, the process description and other details. However even items not requiring a license should not be manufactured within 25 kilometers of a city of more than 1 million residents, unless the item is manufactured in a designated industrial area, or is a non- polluting industry such as software, printing or electronics.
OTHER APPROVALS
4.6 The major other approvals / registrations / licenses regarding a manufacturing facility are:
• License for Capital Goods import (for items other than those freely importable under the Import Policy)
• License for raw materials import (for items other than those freely importable under the Import Policy)
• Factories Act registration
• Labor laws registrations
• Pollution Control Board clearance
• Electricity supply
• Building permission
• Water supply
• Land lease / purchase
• Excise duty registration
• Sales tax registration
• Explosives license
• Licenses to store petroleum products
• Registration under the Boilers Act
• Registration with the State Director of Industries
• Registration under Standards of Weights and Measures Act.
Except for the licenses to import (which are described below), the other formalities are to be complied with at the State or local government level, where the factory is located.
Imports of Capital Goods and Raw Materials
4.7 Most capital goods, raw materials and spare parts are generally permissible (under what is called Open General License - OGL) upon payment of the appropriate import duty. Certain specific items may require a license, however. The licensing authority is the Director General of Foreign Trade, under the Ministry of Commerce. In case the item to be imported is a drug and requires an import license, permission of the DCI must be taken.
5. IMPORTS
Import Licensing
5.1 India does not permit the free import of all goods. While India is a signatory to the World Trade Organization (WTO), it has been given time to remove its quantitative restrictions on imports (QRs) in a phased manner, with QRs to be totally lifted by 2002 or earlier. At present most non-consumer goods items are permitted to be imported freely, while some consumer goods are permitted to be imported freely, and others are prohibited for import. Most items are classified under the International Harmonized System (IHS or BTN) and categorized for import accordingly. Imports and exports are regulated by the Foreign Trade (Development and Regulation) Act, 1992.
Pharmaceutical Imports
5.2 Most pharmaceuticals are freely importable under the foreign trade law. Certain drugs may not, however, be imported except under a license given by the Drug Controller of India. Such products cannot be imported after the date shown on the label as being that on which the potency would reduce or toxicity would increase beyond the standard permitted.
5.3 The foreign manufacturer would have to appoint an Indian agent to apply for the import license. The agent would be responsible for fulfilling all the terms of the license. An agent has to be an entity (individual, partnership or company) registered in India. A license is valid for a year, up to December 31st of the year following the year in which the license was granted, and has to renewed thereafter. The importer must have a license to stock and sell drugs. In case there is any repacking or labeling to be done, then the importer must also have a drug manufacturing license. A single license may be applied to all drugs imported from one manufacturer, provided that the drugs are manufactured at one factory or more than one factory functioning conjointly as a single unit. If the drugs are made in two separate factories, a separate license is required for drugs manufactured by each such factory.
5.4 In case the drug being imported is a “new” drug, i.e. not so far used in India or used for less than 4 years, it has to be approved by the DCI for sale or clinical trials in India before he will give an import license.
5.5 The license holder has several responsibilities including: maintaining detailed records of sales, permitting inspectors to enter his premises to take samples, to
furnish samples to the DCI for examination when required, not selling any item of a batch until the sample is cleared (if so directed by the DCI), withdrawing or recalling sold items if the batch from which the sample is drawn does not meet the prescribed standards.
5.6 All license applications from the importer/agent have to be accompanied by an undertaking from the foreign manufacturer stating that the applicant is the authorized agent of the manufacturer, the date since when the manufacturer has been making drugs at the relevant factory premises, an undertaking that any change of location of manufacturing will be informed to the DCI, an undertaking that the drugs imported will comply with the Indian standards and other undertakings as to compliance with the DCA and the conditions of license.
6. TARIFFS
Duty on Imports
6.1 The import duty structure depends on the classification for import tariff and excise duty (classification is more or less similar to the IHS/BTN). Import duties are prescribed by the Customs Tariff Act. Specified life saving products can be imported at zero duty. For most other pharmaceuticals, the duty structure would be roughly as below:
Rupies (Rs.)
* C.I.F. value of the imported item (say): Rs.10.00
* Basic duty: 30% of c.i.f value Rs.3.00
* Countervailing duty 16% of c.i.f. value plus basic duty plus surcharge Rs.2.08
(equal to the rate of excise duty if the item was made in India)
* Special additional duty 4% of the total of all the above Rs.0.60
* Total landed cost Rs.15.68
* Effective duty rate 56.8%
Note 1.: c.i.f. value is based on supplier’s invoice, which if in foreign currency is converted to Indian currency at a standard rate.
Note 2.: duties are paid by Indian importer in Rupees. Supplier can be paid in foreign currency: US$ etc.
Duty on Local Manufacture
6.2 In case the product is manufactured in India, the primary tariff structure would be as below:
* Ex-factory sale price of the item (say) Rs.10.00
* Excise duty: 16% of the above value Rs.1.60
* Total ex-factory price Rs.11.60
* Effective duty rate 16%
Sales Taxes
6.3 For both imports and local manufacture, after this point, there is a further sales tax levied mainly at the point of sale from the retailer to the customer. This tax is a percentage of the sale price and such percentage is the same for domestic or imported items. It may vary depending on the type of product. There may be other local duties which vary depending on the item and in which State of India the sale transaction takes place. Sales and local taxes vary from 4 to 10% of the price depending on item and location. Sales tax is chargeable upon sale by manufacturer to stockist/ wholesaler, from stockist/ wholesaler to retailer and from retailer to customer. In some cases there are setoffs.
7. PRICING
Price Regulation
7.1 Drug prices in India are among the lowest in the world (and imports are therefore negligible). This is because of several reasons. The first is that only product patents and not process patents (for pharmaceuticals) are so far recognized under Indian law. Therefore Indian manufacturers can make bulk drugs and formulations by “reverse engineering” of the overseas patented medicines, reducing R&D expenses and also avoiding royalty payments. Further, Indian labor costs are low compared to overseas levels. India also has a large pool of technical and managerial personnel and does not need management skills from overseas. Most of the plant and equipment required is made locally.
7.2 Most importantly a measure of statutory price control for bulk drugs and formulations operates in India. Certain drugs (known as scheduled drugs, as they are listed in the First Schedule to the DPCO), 76 in number and accounting for 50% of Indian retail sales), are under price control, and the prices for the bulk drugs and formulations thereof (whether imported or locally manufactured) are restricted by certain formulae prescribed by Government under the Drug Price Control Order, 1995 (DPCO). Non-scheduled drugs can be priced freely, subject to some restrictions. The price control regime is administered by the National Pharmaceutical Pricing Authority (NPPA). The Government can exempt certain products from price control if they are new drugs discovered in India or bulk drugs produced from the basic stage by a new process discovered in India or drugs manufactured by small-scale industries (capital investment below a certain level) and sold under their own brand names. Price control does not apply to formulations under the Indian system of medicine or homeopathic medicines or items to which the DCA does not apply.
The Government of India announced in February 2002, the Pharmaceutical Policy 2002, in which it is proposed to make changes in the method of detaining price controlled drugs and also in the pricing formula. However, these changes have not yet been implemented through legal notifications.
Scheduled Drugs
7.3 Scheduled drugs have been selected as such based on a combination of certain criteria including: number of manufacturers, market share of a single formulator, and the value of annual turnover. The schedule is not fixed, and items can be added or deleted by the Government, depending on the criteria. Most of the other drugs are antibiotics. Scheduled drugs may be bulk drugs or formulations. Scheduled formulations are described as formulations containing any bulk drug specified in the First Schedule either individually or in combination with other drugs, including one or more than one drug or drugs not specified in the First Schedule except single ingredient formulation based on bulk drugs specified in the First Schedule and sold under the generic name.
Pricing of Scheduled Bulk Drugs
7.4 Scheduled bulk drugs are allowed prices (excluding local taxes) that result in a post-tax return of 14% on net worth (share capital plus free reserves less value of investments not related to the bulk drug business) or a 22% return on capital employed (fixed assets plus working capital). In respect of a new plant, an internal rate of return based on long term marginal costing is allowed. For a bulk drug produced from the basic stage, a post-tax return of 18% on net worth or a return of 26% of capital employed is allowed. The prices have to be applied for to the NPPA before any sales take place, with detailed supporting calculations and thereafter officially sanctioned (NPPA may make changes), and cannot be revised without prior approval.
Pricing of Scheduled Formulations Manufactured in India
7.5. Scheduled formulations are priced based on the formula:
RP = (MC + CC + PM + PC) x (1+ MAPE/100) + ED
where RP is retail price, MC is material cost, CC is conversion cost, including labor and overheads, PM is packing material, PC is packing charges and MAPE is Maximum Allowable post-manufacturing expenses. ED is excise duty. MAPE is intended to cover all costs incurred by a manufacturer after packing, i.e. transport, manufacturers profit, dealers / retailers profit, etc. MAPE/100 should not exceed 100%. Local taxes are added on at the wholesaler/retailers level, and are not part of the retail price as above.
The process for approval of prices is similar to that for bulk drugs. The price charged to a retailer is the approved retail price less 16% (as against the usual practice of 20%). The margin to the wholesaler should not exceed 8% (as against market practice of around 10%). It should be noted that all the costs are not the actuals. In some cases the NPPA notifies standard prices for inputs, such as sugar. There are also norms for conversion cost, wastage, wages, etc.
Example
7.6 An example of pricing of a locally manufactured scheduled drug is provided below (assuming the actual costs are lower than or equal to the Government norms):
* Material cost Rs.3.25
* Conversion cost Rs.0.75
* Packing material Rs.1.53
* Packing cost Rs.0.12
* Total Rs.5.65
* Post manufacturing expense 100% above cost Rs.5.65
(to cover other costs plus profit)
* Total: Rs.11.30
* Add: excise duty 16% of sale price Rs.1.59 to wholesaler (9.96 as below)
* Retail price: Rs.12.89 + local taxes
* Price to retailer (84% of 12.89 above) Rs.10.83 + local taxes
* Price to wholesaler (92% of 10.83 above) Rs.9.96 + local taxes
* Less: manufacturing costs: Rs.5.65
excise duty 1.59
7.24
* Balance for marketing, transport, etc. and profit of manufacturer Rs.2.72
(27% of sales price)
Pricing of Scheduled Formulations Imported into India
7.7 In this case the formula for calculating the retail price is that the importer can add to the landed cost of the goods (cost plus inward freight plus clearing charges plus import duty) 50% more to cover distribution cost including trade margins and profit to arrive at the retail price. Sales taxes, if any, can be added on separately. The price to the retailer must be the approved retail price less 16%. The margin to the wholesaler should be 8%.
Example
7.8 The price build up for an imported price controlled drug would be roughly as below:
Rs.
* Landed cost as per para 5.1 above 15.68
* Clearing charges 2% of CIF value Rs. 10 0.20
* Total 15.88
* Add: 50% mark-up 7.94
* Retail price 23.82 + local taxes
* Price to retailer
(84% of 23.82 above) 20.00 + local taxes
* Price to wholesaler
(92% of 20.00 above) 18.40 + local taxes
* Less: total cost 15.88
* Balance for marketing, transport, etc
and profit of importer 2.52
(13.7% of sales price)
Note: there is no restriction on the price the overseas manufacturer charges to the importer.
Procedure for Price Fixation
7.9 No person can sell or dispose of an imported scheduled formulation unless it has prior approval of the price from the NPPA. Also, no manufacturer or importer can market a new pack, new formulation or new dosage form without obtaining the prior approval of its price from the NPPA. However, where a manufacturer introduces a formulation similar to an existing one in a new pack, he may rework the price thereof based on the norms that the NPPA may announce and intimate the new price to the NPPA. After 60 days the pack may be sold at the price intimated, unless the NPPA revises the price, in which case the revised price will hold. In other cases, the importer or manufacturer has to file details justifying the price in the appropriate form. The NPPA will have to give approval first. The approval may be the price applied for or a lower price. A similar procedure applies to price revisions.
7.10 The NPPA also has the power to fix the ceiling price of scheduled formulations, based on the cost structure or efficiency of the bulk drug manufacturers, and such ceiling price shall be the maximum for all such formulations. The ceiling price can be changed by the NPPA on its own or on application made by a manufacturer.
7.11 The NPPA has the power to fix the price of a non-scheduled or scheduled local or imported formulations, based on information it may call for from the manufacturer or importer. The price fixation may be done in such manner that the pre-tax return of such manufacturer or importer should not exceed the pre-tax return specified in the Third Schedule to the DPCO. This prescribes different rates of return, which depend on a number of criteria such as whether the manufacturer has basic drug manufacturing activity besides formulations, whether it conducts research activity, and the turnover level of the unit. The minimum return is 8% and the maximum is 13%. However, notwithstanding this, the NPPA has the power to fix or revise the price of any formulation, including a non-scheduled formulation. It also has the power to include any bulk drug in the First Schedule and fix or revise the prices of the bulk drug and the formulations thereof.
Filing of price lists
7.12 For scheduled formulations, the manufacturer has to file a price list of all the prices fixed and/or revised for with the State Drug Controllers, the dealers and the Government, giving reference of the official price notification by the NPPA. The price list has to be prominently displayed by each dealer in his premises. Similarly, for each non-scheduled formulation the circulation of price lists as above is mandatory.
Price labeling
7.13 All packages of formulations (the outer container as well as the minimum pack being offered for sale) must bear the retail price (whether fixed by the NPPA or otherwise) with the words “retail price not to exceed” preceding the price and the words “local taxes extra” after the price. In this regard the requirement is different from the usual method of price marking for other commodities specified by the SWM, where the price on the package should be the maximum price inclusive of all taxes.
8. MARKETING AND DISTRIBUTION
8.1 This section deals with aspects of marketing: licensing of sales outlets/ stocking points, OTC and ethical drugs, advertising and promotion, packaging and labeling, distribution methods, brand names, restrictive trade practices and consumer protection.
Licensing of Sales Outlets and Stocking Points
8.2 Under the DCA, sales offices, pharmacies or any other sales outlet or stocking point for drugs must be licensed to do so by the State Government having jurisdiction over the office/pharmacy. Where drugs are sold/stocked for sale at more than one place, a separate license is required for each such location. A license once issued would be valid till December 31st of the year following the year in which the license has been granted.
8.3 The requirements and conditions for a license to stock and sell drugs (other than on a wholesale basis) include:
• specified minimum area and equipment
• compounding of drugs on the premises should be done by a Registered Pharmacist
• sales of any drugs on prescription should be under the supervision of a Registered Pharmacist (qualification and experience profile are specified), and a prescription register (for compounded drugs) or cash or credit memo book (for other medicines) maintained
• prescription register or sale memo should contain the specified particulars of the sale (including batch number of manufacture in case of prescription drugs)
• no prescription drug is to be sold without a prescription
8.4 There are restricted licenses for outlets that do not need the services of a Registered Pharmacist (these are to be called “drugstores”), and those where no compounding takes place (to be called “chemists and druggists”). Outlets may use titles such as “Pharmacy,” “Pharmacist,” “Pharmaceutical Chemist,” or “Dispensing Chemist” only if they use the services of a Registered Pharmacist and maintain a pharmacy for compounding.
8.5 Wholesale and retail outlets would also need registration under the:
• the Shops and Establishment Act
• the Standard of Weights and Measures Act
• labor legislation
• sales tax
These are all local registrations.
OTC and Prescription Drugs
8.6 There is no category of drugs legally specified as OTC drugs. The DCA specifies certain drugs to be sold only under prescription. The rest can be sold without prescription. However drugs can be sold in retail only by licensed outlets as described earlier. The list of prescription drugs is quite large and covers all antibiotics, a number of painkillers, etc. Prescription drugs cannot be advertised in the general media. The DCA also provides a list of ailments that no drug may purport to prevent or cure.
In practice, a large number of prescription drugs are sold without prescription. However, this does not mean that self-medication is common, except to some extent in the upper classes of society. Most people like to take medical advice, either of doctors or of pharmacists. Even in case of prescriptions, due to cost considerations, several customers buy less than the prescribed amount, or ask the chemist for a cheaper alternative. The pharmaceutical industry has requested the Government to review this issue, and the Government has set up a committee of officials to draw up a list of OTC items. This would require an amendment of the DCA. The OTC items would be allowed to be advertised in the general media. At present there are a few so-called OTC drugs (15-20 types) such as rubs and balms, pain relievers, antacids, etc. Health drinks are, of course, commonly advertised.
Advertising and Sales Promotion
8.7 In the above circumstances, the avenues for advertising are restricted. Presently, advertising, as such, is restricted to trade journals, such as chemists’ guides and directories, and medical magazines. Another method of “advertising” is to sponsor conferences in India and abroad and have doctors attend, often at company cost. At these conferences, various pamphlets and other material are distributed to the doctors, as well as complimentary items.
8.8 At the pharmacy level, the advertising is in terms of point-of-purchase displays. However the major incentive to chemists is the free (bonus) supplies of drugs. This is also a method of overcoming the retail commission restrictions under the DPCO.
8.9 The most important method of sales promotion is of medical detailing. The doctor is extremely important, as it is he who recommends treatment. A large company could have as many as up to 200-250 medical representatives whose duty is to visit doctors and hospitals, provide them with (technically non-saleable) samples and literature and brief them on new products. The representatives are qualified in science/chemistry/pharmacy or experienced in the field. They are given sales targets and other objectives. They have to file field reports and provide market intelligence as well.
Advertising Standards and Self-Regulation
8.10 Apart from restraint on advertising of prescription drugs, and making claims to provide prevention or cure of certain diseases, there are no legal constraints on advertising. However, advertisements should not make unjustified claims, and complaints can be made to the Advertising Standards Council of India (ASCI), a self-regulatory body. The purpose of this body is to complement and not replace the law. It is meant to maintain high standards of advertising. The advertising profession has drawn up the self-regulation code, which is administered by the ASCI, and advertisers, agencies and associations accept the same. The code has the objectives of ensuring truthfulness and honesty of representations and claims, safeguarding against misleading advertising, ensuring that advertisements are not offensive to general standards of decency, safeguarding against the indiscriminate use of advertising for products that are regarded as hazardous to society or to individuals to an unacceptable degree, and ensuring that advertisements observe fairness in competition so that the consumer’s need to be informed about products in the market are balanced with generally accepted competitive behavior in business. If there is a complaint brought to the ASCI, it may ask the advertiser to withdraw or modify the advertisement in question if it deems fit. This has no legal basis, and if either of the parties is not satisfied they may take up the case in the courts under the laws related to restrictive trade practice or under the laws related to public decency.
Packing and Labeling
8.11 While specific aspects of labeling have been described elsewhere in this report, the major legislation affecting the same is the SWM and the PCR. The purpose of the SWM is to regulate inter-state trade in weights and measures and other goods, which are sold by weight or number. The general requirements of SWM / PCR are that the package carry the necessary information for consumers in a proper manner. Some of the major provisions of this legislation are:
• the necessary declarations as to name of manufacturer, date of manufacture, commodity, contents, weight, price, etc should be made on all packs
• the principal display panel (the area of the label on which the consumer looks for information about the product) should be as per the rules (size, size of letters, etc)
• all declarations should appear at the positions specified
• declaration of quantity should be made as per the norms and in the prescribed manner
• the statement of units or weight, measures or numbers should be as per norms
• specified commodities should be packed in the prescribed pack size, and within the prescribed margin of error
Distribution
8.12 India is geographically a very large country, with the population located in both urban and rural areas. There is at present no system of national chains of supermarkets or drugstores/pharmacies, and small independent shops dominate retailing. A manufacturer or importer has to make its own arrangements for distribution to the retail level. Due to complications arising from different sales tax regimes in various states, as well as taxes on inter-state sales, operating a few centralized warehouses and distributing to the rest of the country from there is not a common practice. Further, there are very few national marketing agencies that market third party products throughout the country. The method of distribution is therefore from the manufacturer’s location to local depots for stocking. These depots are either run by the company or contracted out to so-called carrying and forwarding agents (C&F), who operate the depots on the company’s behalf, but employ their own staff and premises. The practice of operating company owned depots is reducing over time in favor of the C&F system. The C&F is under the supervision of the company’s regional office (usually at least four offices based in Mumbai, New Delhi, Calcutta and Chennai, representing the West, North, East and South regions). Each regional office looks after sales in four or five states.
8.13 The dispatch of goods takes place from the manufacturer’s location to the C&F locations, but without invoicing at that stage, as it is only a transfer of goods and not a sale. The C&F sends goods to wholesalers who have stocking points. At this point the goods are invoiced by the company to the wholesaler, and the legal sale takes place. However the company also retains the responsibilities under the DCA as applicable to manufacturers. The wholesaler has to pay the company for goods supplied. Besides dispatch, the C&F agent also performs functions such as providing sales staff, invoicing and collection. The agent is remunerated at 2% of the goods sold, plus expenses, but this could vary depending on the volume and the services provided.
8.14 The wholesaler is responsible for sending the goods to the various retailers under his jurisdiction. He invoices the sales in his own name and collects the money. The wholesaler has his own sales/delivery staff that surveys stock levels, order collection and supply. The utility of the wholesaler is that he can deliver small quantities of material to a large number of outlets economically and in time. A wholesaler receives a commission of 8-10% of the sale price. The company’s sales representatives co-ordinate with both the C&F agent and the wholesaler to expedite sales and dispatches. Usually sales representatives are paid a part of their salary as a fixed monthly amount and partly by commission on sales in their territories.
Brand Names
8.15 There is no restriction on the use of foreign brand names on products sold within the country, whether locally manufactured or otherwise. The brand names may even be licensed to an Indian party. Brand names should not, however, be covered by an existing Indian registered trademark, unless the trademark has been registered wrongly. The usual practice is for brand names to be used as part of an overall foreign collaboration (along with equity investment and/or technology transfer), though there is no restriction on having trademark agreements alone.
Restrictive Trade Practices
8.16 The Monopolies and Restrictive Trade Practices Act, 1969 (MRTP) was intended to curb monopolistic power of industrial groups and to prevent restrictive trade practices. In effect it sought to regulate business through Anti-Trust type legislation restricting expansion, merger, amalgamation and new projects of large industrial groups without Government permission. The restrictions have largely been deleted from the Act, and it is now recast in a manner to deal only with restrictive trade practices such as price fixing, restrictive clauses in dealership agreements, unfair promotions, misleading advertisements, promotions against consumer interest, etc. The Director General may institute "suo moto" (by himself) investigations into any such practice, or may investigate based on a complaint brought by any person, whether a consumer or a competitor.
Consumer Protection
8.17 The Consumer Protection Act (COPRA), 1986 was enacted to establish methods of protection of consumer interest. The Act provides a method for consumer complaints against manufacturers, sellers and service providers to be made and redress obtained at nominal cost. Suitable compensation/ damages would be awarded to the aggrieved customer, if the complaint is found justified. A complaint can be lodged by the consumer concerned or a “recognized” consumer association. The objective of the act is allow complaints to be lodged with specialized tribunals for consumer complaints outside the regular legal system, which is expensive and time consuming. Small value complaints can be made to local district forums. If the complaint is for more than Rs. 100,000 but less than Rs. 1 million, the complaint has to be lodged with a State level Commission. Above this level, complaints have to be made to the National Commission. Complaints are usually lodged against overcharging, defective goods, deficiencies in service causing loss, false claims and advertising.
9. PATENTS AND TRADEMARKS
Patents
9.1 Under the Indian Patents Act, 1970 (IPA), a patent entitles the holder exclusive rights to manufacture, sell and distribute the product in India. For foods, medicines, drugs and substances prepared or produced by chemical processes, only process patents are given. Any manufacturer in these product ranges can "re-engineer" a patented item (manufacture the same item with a different process) and sell it without legal challenge by the patent holder.
9.2 Patents are registered with the Controller General of Patents, Designs and Trade Marks. The head office is in Calcutta, with branch offices in Delhi, Bombay and Madras. Applications must be filed in the appropriate office, with a provisional specification (with complete specification within 12, extendable to 15 months thereafter) or a complete specification. The patent application and specifications are studied by the examiners (eighteen months time is given to examine). Once the specification is accepted, the notice of patent is advertised in the Government's official gazette. Three month's time is given for notice of opposition. The opposition is to be replied to by the patent applicant within a month. Thereafter, the application is accepted or rejected. If the application is accepted, the patent is sealed. A patent is dated as of the date the complete specification was filed. For items of food or medicine, the process patent is granted for five years from the date of sealing or seven years from the date of the patent, whichever is earlier. For other inventions, the patent is granted for fourteen years from the date of the patent. Patents can be legally assigned or merely licensed to other parties, for use in India or any part of the country.
Besides this process, the Government may, on a reciprocal basis, declare any other country as a "convention" country, for the purpose of fulfilling any treaty. In such a case if a patent holder abroad makes an application in India within 12 months of having applied for a patent abroad, his patent protection in India will start from the same date it starts in his own country. India is a signatory to the Patent Convention Treaty, 1970.
Recent Amendments to Legislation
9.3 Under the TRIPS provisions of the WTO agreement, to which India is a signatory, India had to implement the minimum specified standards of intellectual property protection with effect from 1st January 1995, with an additional period of five years being allowed before it extended product patents to areas of technology not covered so far. Further, WTO member countries that did not provide for product patents in the areas of pharmaceuticals and agricultural chemicals had to provide, with effect from 1st January 1995, a mechanism (mail box) for receiving patent applications for such products and also to grant exclusive marketing rights (EMRs), also known as the “exclusive right to sell or distribute,” for a period of five years or until the patent was accepted or rejected, whichever the is shorter.
9.4 The issue of granting product patents for all foods, medicines, drugs and substances produced by chemical processes is still under discussion. At present the Government has, in 1999, passed an interim measure by an amendment to the IPA, providing for EMRs for items where only process patents are granted. This measure is effective through 31st December 2004. From 2005, India has to fully comply with the international standards on patents. However the revised patent law has not been drafted so far. The recent interim amendments are discussed below.
Product patent applications for medicines and drugs
9.5 Product patent applications for medicines and drugs will now be accepted by the Controller of Patents (“the Controller”), but will not be sent for examination until 31st December 2004. For this purpose, “medicine or drug” includes: medicines for use by humans and animals, substances used for diagnosis or prevention of disease in humans or animals, substances used for the maintenance of public health or prevention or control of epidemic diseases among humans or animals, and substances used for the protection and preservation of plants. Chemical substances used as intermediates in the preparation of the above substances have not been given product patent protection.
Application and grant of EMR
9.6 Applications for EMR can accompany the application for patent and EMR may be granted if the item is deemed patentable under the general law of patent. EMR will not be given for items based on the Indian system of medicine (eg. Ayurvedic) if the items are already in the public domain.
9.7 . EMR will be granted where a patent application has been made in India and where before the date of such application, the item has already been patented in a convention country (a country which is notified as such by the Indian Government as having reciprocal arrangements for dealing with patent applications; India is also a signatory to the Patent Convention Treaty, 1970) and approved for sale or distribution in that country (provided the application for patent was filed in that country on or after 1st January 1995), and also approved for sale and distribution within India by the appropriate authority. EMR will also be granted where the invention has been made in India, and a process patent has been applied for and granted on or after 1st January 1995.
9.8 EMR will entitle the applicant the exclusive right for himself, his agents or licensees to sell or distribute the item in India for a period of five years from the date of approval or till the grant or rejection of the patent application, whichever is earlier. If, however, the specifications of the item under EMR have already been recorded or the item already tried or used or sold by any person, before the date of claim for patent in India, then sale or distribution of the item by that person, after the date of claim for patent is not deemed to be an infringement of EMR. This does not apply where the details of manufacture were originally supplied by a person who held the exclusive right to sell or distribute the item.
Compulsory licensing and revocation of EMR
9.9 At any time after two years from the date of approval for EMR, any person may apply to the Controller alleging that the requirements of the public with regard to the EMR item have not been fulfilled or that the item has not been made available at a reasonable price, and may request for a compulsory license to sell or distribute the item.
The Controller may, if he considers the application justified, order the EMR holder to grant a license to the applicant for sale. The Controller has to take into account, the time that elapsed since the date of EMR approval, the ability of the applicant to sell or distribute to the public advantage, and the capacity of the applicant to provide capital for the operation. The provisions for compulsory licensing are also applicable in the case of patents already granted (applications to be made only three years after the date of sealing the patent). The Controller also has powers to revoke an EMR in the public interest (as it has the power to do for patents already granted).
Powers of Central Government to order sale or distribution by itself or any other person
9.10 The Central Government may, if it decides it is in the public interest, sell or distribute the item reserved for EMR by itself or through any other person (other than the EMR holder). The Central Government may also, if it decides it is in the public interest, direct that the EMR item be sold at a price determined by an authority to be nominated by the Government.
Permission for residents to apply for patents outside India
9.11 Under the previous law, residents of India were not permitted to make patent applications abroad without written permission of the Controller. This requirement has now been removed, and any resident of India can apply for patents in overseas countries.
Trademarks
9.12 The law on trademarks is the Trade and Merchandise Marks Act, 1958 (TMMA). The TMMA provides for registration of trademarks for a period of 7 years at a time, renewable after each such period. Presently only goods, and not services, can have registered trademarks. For any item, trademarks should not be objectionable from religious or social points of view. They should not contravene the Emblems and Names (Prevention of Improper Use) Act, 1950. They should also not be already registered or applied to be registered in India. The trademark can be registered even if the item is not produced or sold in India at present.
9.13 Applications have to be made separately for trademarks for each class of goods to be covered. These applications are to be filed with the Trade Mark Registry at either Delhi, Bombay (Head Office), Madras, Calcutta and Ahmedabad depending on the location of the applicant's principal place of business. There is first an application for "search" to determine whether the proposed registered trademark is already registered by someone else, or whether an application for the same is already pending. After the search, the applicant is then given a registration number (which may take over a month), and then the examination process begins. The law specifies one year for this process. If the examiners clear the trademark, then the notice inviting objections has to be published in the Trademark Journal, a Government publication. Objections must be filed within 3, extendable to 4, months. After objections, the applicant has two months to reply, failing which it will be assumed that he has abandoned the application. After this the Registrar will decide whether to grant registration or otherwise. Thereafter it takes about six months to receive the certificate of registration. However when registration is granted, the effective date of start is the date of the original application.
9.14 Besides this process, the Government may determine "convention" countries, in pursuance of treaty obligations, whereby a person, after making an application in his home country, may within 6 months apply to register in India, and he would be deemed to have been registered in India as of the date of his home country application. As in patents there can be assignment of a trademark and also licensed use for a fee.
9.15 A foreign trademark can be used without any restriction. It can also be registered. A trademark can also be used without registration or used before registration or after expiry of the registration, but this use would not have protection of the TMMA. Recently Indian courts have held, that copying of international names (even in products that are not made in India by the international trademark holder) is not permissible. Several international companies are engaged in trademark litigation in India, including IBM, Apple, Microsoft, Dunhill, Whirlpool, Sony and Cartier.
10. MARKET ENTRY AND INVESTMENT
Entry Strategies
10.1 Three entry strategies are available for entering the Indian pharmaceutical market. In some cases all three strategies are followed sequentially as the overseas party becomes more familiar with the Indian market:
• imports through agent
• manufacture under license
• investment in joint venture / subsidiary company
Imports Through Agent
10.2 . Imports of formulations to India are negligible due to the price disadvantage arising from imports due to tariffs and local manufacturing cost advantages. The lack of patent protection has also contributed to this. Further, the product approval process can be difficult. Price controls are also an added negative factor. However, assuming that the market proves to be adequately substantial and remunerative, then this strategy could be employed. Under current policy, a foreign manufacturer is unlikely to be allowed to set up a 100% subsidiary in India only for imports. In case the company is prepared to do some exports from India, then it can be allowed to invest up to 51% equity (the balance to be held by Indian resident individuals or companies) in a trading company that is primarily involved in exports (it can import as well). India exports a large number of bulk drugs and formulations to several countries.
Manufacture Under License
10.3 In order to avail of the lower manufacturing costs available in India, a foreign manufacturer can have the product made in India by an Indian manufacturer (multinational company or otherwise) under license. The foreign entity can charge a one-time technology transfer fee of up to US$2 million and receive royalties of 5% on local sales and 8% on export sales, with the post facto approval (known as “automatic approval”) of the Reserve Bank of India (RBI). Higher royalty payments require the approval of the Foreign Investment Promotion Board (FIPB). A foreign company can also invest in the equity of the company manufacturing the product as described in the following paragraph. Even in this situation, it could continue to receive royalty and technology transfer fees as above. The foreign company can also charge for the use of trademarks at the rate of 1% of domestic sales and 2% of export sales. However, the “automatic approval” route is not available to foreign companies that either have or have had in the past a joint venture/ technical collaboration/ trademark agreement for the same or allied product. In such a case the foreign investor will have to apply for specific approval to the FIPB.
Investment in Joint Venture / Subsidiary Company
10.4 Foreign investment in a new or existing Indian registered company in the pharmaceutical manufacturing business (up to 100% of the equity through an issue of new equity shares) is permitted under the “automatic approval” route, prescribed by the Foreign Exchange Management Act 2000 (FEMA). Under this procedure there is no necessity to take prior approval for foreign investment. The RBI has to be informed only after the capital has been remitted into India. Automatic approval is not allowed in cases where industrial licensing is mandatory. Further, “automatic approval” route is not available to foreign companies which either have or have had in the past a joint venture/ technical collaboration/ trademark agreement for the same or allied product. In such a case the foreign investor will have to apply to the (FIPB). A foreign investor may also acquire the whole or part of an existing company by buying out existing shareholders. For this, prior permission will be needed from the FIPB and thereafter the RBI. If the company to be taken over is not listed on the stock exchange, the formalities are fewer. If the company is listed, then there are formalities to be complied with in terms of announcement of acquisition of substantial shareholding, public offer to buy out other shareholders at the same price, etc. and other formalities required by the Securities and Exchange Board of India (SEBI).
FIPB
10.5 The FIPB functions under the Ministry of Industry. The Board receives investment and collaboration proposals (other than those for which the automatic approval route is available) and recommends the same or disapproves by rejection or requiring amendments or asks for further clarifications. Rejection is not necessarily the end of the process. The applicant can apply again at a later point in time. The approvals must be signed by the Industry Minister to be effective. The Minister can clear all recommended projects up to Rs. 6 billion. For projects of value above this level, approval has to be given by the Cabinet Committee on Foreign Investment. The approval is communicated by the Secretariat for Industrial Assistance (SIA) of the Ministry for Industry. The FIPB consists of the Secretary, Industrial Development, who is the Chairman as well as the other permanent members: Finance Secretary, Commerce Secretary, and Secretary (Economic Relations) to the Ministry of External Affairs.
For specific investment proposals, other officials from the concerned ministries would attend the FIPB meeting. For example, officials from the Ministry of Chemicals and Fertilisers, Department of Chemicals and Petrochemicals), and from the Ministry of Health and Family Welfare would attend if the application pertained to pharmaceuticals. The Board usually meets every Saturday. Decisions are normally taken within one month after all papers are submitted and all queries raised by the FIPB are answered by the applicant.
10.6 Procedurally, an application to the FIPB is simple and can be made in a letter form. The enclosures are the annual report, corporate profile and product profile. The application should be made in fifteen copies. The application is circulated to the concerned administrative ministry (eg. the Ministry of Chemicals and Petrochemicals and the Ministry of Health and Family Welfare for pharmaceuticals) and other ministries that may have some opinion on the application.
10.7 The FIPB provides single point clearance for foreign investment level, definition of item to be made / marketed, industrial license if required and foreign collaboration terms. It is not, however, meant for getting certain specific licenses and clearances which are given under various other legislation (import licenses, state level licenses for manufacture of drugs, municipal licenses etc). These have to be dealt with separately.
10.8 The FIPB may issue the approval letter with any conditions it deems fit. These include: restrictions on activities, or dilution of foreign equity percentage, over a period of time.
10.9 FIPB was set up originally to consider investment proposals without concern for the existing parameters for permitting foreign investment. However, it has some published guidelines as to the issues it will consider for allowing various levels of foreign equity in each sector. The FIPB considers aspects such as technology brought in, employment to be created, exports, foreign exchange implications, social benefits, the amount of capital to be brought in, and also the image conveyed to other countries / investors.
New procedure for applications from foreign companies which have/ had joint ventures in the same or allied industry
10.10 In December 1998, the Government came out with specific rules for applications for foreign investment/ collaboration/ trademark contracts, which either have current joint ventures or collaborations in India or have had such ventures at any time in the past in the same or allied industry. “Same or allied industry” is defined by the National Industries Classification (NIC), 1987 list of industry codes. In such cases, the “automatic approval” route is not permitted. The application has to be made to the FIPB, and the applicant has to give detailed justification for the new arrangements/ joint venture.
The applicant has to give justification as well as proof that the new venture will not hurt the interests of the existing collaborators/ partners. “Proof” is usually given by obtaining a resolution form the Board of Directors of the current / former collaborator that they have no objection to the proposed investment/ arrangement. Hence an applicant in who had a had a previous venture, however long ago, and even if terminated legally or by mutual consent, would have to go through the same process.
Legal Entity
10.11 Doing business in India by a foreign investor can involve several possible types of legal entity:
• a branch
• a liaison / representative office
• an Indian company with varying levels of foreign shareholding
Branch Office
10.12 Branch status was normally permitted only for banks, airlines, shipping companies and companies carrying out contracts in India. The RBI may permit branch status for carrying out the following activities:
• export/import of goods
• rendering professional or consultancy services.
• carrying out research work, in which the parent company is engaged.
• promoting technical or financial collaborations between Indian companies and parent or overseas group company.
• representing the parent company in India and acting as buying/selling agent in India.
• rendering services in information technology and development of software in India.
• rendering technical support to the products supplied by parent/group companies.
• foreign airline/shipping company.
In practice this is not an option usually used for any substantial level of activity, except in service industries as above. A branch is also taxed at a higher rate of income tax compared to an Indian company, assuming it earns income.
Liaison / Representative Office
10.13 A liaison or representative office is a non- commercial office mainly for studying economic and market trends, disseminating information on overseas products of the parent, searching for Indian partners, etc. No commercial activity, not even giving quotations or making invoices should be undertaken and the expenses of the office (salaries, etc.) should be met by remittances from abroad. This status is used in the early days of the pre-investment period, before an Indian company is established. Permission from the RBI is needed for this status and is usually routinely given in 30-45 days.
10.14 A branch or a liaison office is bound by all the laws of India. In practice the branch is different from an Indian company in that it has to comply with fewer rules of the Companies' Act, and, without the permission of the RBI, there are restrictions on its business activities and its acquisition of immoveable property in India. The branch must file its annual accounts with the Registrar of Companies (ROC) and register themselves with the ROC within 30 days of start up. A branch or liaison office can, through its contractual or other actions, bind the overseas company including claims against the overseas assets and its liability is not restricted to the assets held in India.
Indian Company
10.15 The usual form of business entity is through establishing an Indian company. This is a company limited by shares (mainly equity shares, with a right to participate in profits, and to the extent of which the liability of shareholders is limited). A limited company is registered and regulated under the Companies' Act, 1956, as amended from time to time. A comprehensive amendment is about to be introduced in the near future. The Companies' Act is a central legislation administered by the Ministry of Law, Justice and Company Affairs. An Indian company is very similar to a company in the U.S.A. or the U.K.
10.16 There are two types of company: private limited and public limited, distinguished by several factors such as capital, turnover, maximum number of shareholders, restrictions on rights to transfer shares, restriction on obtaining funds from the public etc. The distinction between the two is in certain areas such as documents to be filed with the ROC and capital raising and other formalities. It should be noted that "public" does not imply that the shares have to be compulsorily listed on a stock exchange. All laws and tax rates are applied uniformly to all companies, regardless of the percentage of foreign ownership. It should be remembered that generally the limited company structure restricts the liability of the members to the share capital. However, there have been cases where foreign majority companies’ parents have been sued for acts of the subsidiary, and the courts have permitted the so-called corporate veil to be pierced.
10.17 In any type of company, shareholders' rights are governed by the Companies' Act, 1956, and there are two types of resolution - ordinary and special - that must be passed at shareholders' meetings. Ordinary resolutions are passed by a simple majority of the members present and voting (including proxies) and special resolutions need to be passed by a three- fourths majority. Some resolutions (such as those for inter- corporate investment in excess of specified limits, or changing main objects of business) have to be approved by the Government and some resolutions have also to be approved by the High Court (merger, amalgamation, etc.)
10.18 Examples of matters requiring ordinary resolutions are:
• adopting the annual accounts
• declaration of dividends
• appointing directors in place of retiring directors
10.19 Matters requiring special resolutions include:
• altering the provisions of the Memorandum of Association (the basic charter of the company) with respect to the main objects of the company or the location of the registered office
• altering the Articles of Association (the internal rules governing the company, shareholders and directors)
• reduction of share capital
• commencing a new business or disposing off an existing business
10.20 In practice a company can be controlled effectively with 51% of the shares, and comprehensively with 75% of the shares. Many foreign companies operate with 40% and above.
10.21 The Board of Directors is appointed by the shareholders and may do the acts and carry out the activities that the company is authorized to do. The Board cannot, however, exercise any power which, either by the Companies' Act or by the Memorandum or Articles of Association of the Company, is required to be exercised by the company in general meeting. The Board of Directors may include foreign citizens, but permission of the Government and of the Reserve Bank (for receiving salary from which they are to make remittances overseas) is required.
Company formation
10.22 The formation of a company requires submission of various documents to the ROC of the State in which the company is to be incorporated. The main documents to be submitted are:
• Application for name of company (one month before the other documents)
• Memorandum of Association
• Articles of Association
• Directors consent to act as such
• Notice of situation of registered office
The ROC will, after scrutiny of the documents, issue a certificate of incorporation. If the company is a public company, it must then file a prospectus or statement in lieu of prospectus. Thereafter the ROC will issue a certificate to commence business, after which business activity may commence. In case the company uses names of overseas collaborators, the ROC will require a letter of no objection from the parent company to the use of the name in the Indian subsidiary.
10.23 Once a company is formed and its bank account opened, the foreign investor can remit in foreign exchange its share of capital from abroad, in accordance with the “automatic” or FIPB approval. Dividends on capital are payable in foreign exchange. Similarly, the capital and profits thereon in case of sale of the whole or any part of the foreign holding can be remitted overseas in foreign exchange, after payment of Indian taxes. However prior permission of the RBI is required for selling these shares. Royalty and technical service fees are also payable in foreign exchange (subject to Indian taxes), though they may be paid net of taxes (taxes being borne by the Indian company) if the collaboration agreement so provides.
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