By - King Stubb & Kasiva on March 20, 2023
Owing to its rapid growth, the Indian pharmaceutical industry has gained prominence on the international stage. It is currently the third-largest pharmaceutical industry in terms of volume and the 14th-largest in terms of value.[1] Yet, growing competition, pricing pressures, and regulatory barriers have made it difficult for enterprises to enter the market while remaining profitable. In this context, Joint Ventures in Pharma Sector in India have emerged as a viable option for pharmaceutical companies looking to enter or expand their presence in the Indian market.
Joint ventures are strategic alliances formed by two or more organizations to pool their resources and abilities to achieve common economic goals. They offer a variety of benefits, such as risk sharing, access to new markets, and access to new technologies. Joint ventures have grown in importance in the Indian pharmaceutical industry because they allow foreign firms to leverage the local knowledge and expertise of Indian partners while navigating the difficult regulatory framework.
To enter into a joint venture in the Indian pharmaceutical industry, a comprehensive understanding of the legal and regulatory structure governing such partnerships is required. This article aims to elaborate upon the legal and regulatory framework required to be understood for Joint Ventures in Pharma Sector in India in the following manner:
Joint ventures must ensure compliance with the legal framework for Joint Ventures in the Indian Pharma sector, as discussed below.
Joint ventures in the pharma sector in India are often formed as a private or public company under the Companies Act of 2013 or as a limited liability partnership under the norms of the Limited Liability Partnership Act, of 2008. The Memorandum of Association (MoA), Articles of Association (AoA), and verification of registered office address are the primary registration documents. Furthermore, information and documentation on the company’s directors and shareholders, such as Permanent Account Numbers (PANs), Director Identification Numbers (DINs), and evidence of identification and domicile, are required.
The Ministry of Corporate Affairs (MCA) website offers joint venture registration services.The necessary forms and incorporation documents must be filed with the Registrar of Companies (RoC) of the relevant jurisdiction for companies.
The Companies Act includes requirements for joint venture firm formation and governance, such as shareholding, management, and governance restrictions. The Act addresses mergers and acquisitions, stock ownership, and joint venture governance.
The Foreign Exchange Management Act, 1999 (FEMA) regulates foreign investments in India and creates criteria for joint ventures that include foreign investment. The Reserve Bank of India (RBI) is the principal regulator of foreign investment in India and has created standards for multinational firms engaging in Indian joint ventures. The FDI Policy, as created under FEMA, is discussed further to understand the required regulatory compliances.
Intellectual property protection is critical for any joint venture in India’s pharmaceutical industry, as it necessitates navigating complicated legal terrain and filing a considerable amount of paperwork. India recognizes different types of intellectual property, each with its own set of laws to protect it such as The Patents Act, of 1970, the Trade Marks Act, of 1999, etc. Foreign investors who form joint ventures in India can protect their intellectual property by registering it and including certain terms in the joint venture agreement.
The joint venture agreement may include separate papers in addition to licensing agreements, know-how agreements, technical services or assistance agreements, royalty payment agreements, franchise agreements, and agreements about the use of intellectual property rights. India’s intellectual property laws also allow for compulsory licensing in some circumstances, such as when the IP owner fails to make the protected technology available to the public at a reasonable price.[2]
Throughout the last decade, India’s FDI policy for the pharmaceutical industry has seen significant changes. The current foreign direct investment policy divides investments into greenfield and brownfield. Greenfield investments are undertaken from the ground up in the construction of new facilities, and 100% automatic route FDI is permitted. Brownfield investments, on the other hand, are made in established pharmaceutical enterprises, and the automatic route allows for up to 74% FDI. For investments beyond 74%, however, government permission is required.[3]
In both kinds of investments, a non-compete clause is generally required under both automatic and government routes. Certain additional conditions are required to be fulfilled for brownfield investments. These include maintaining an absolute quantitative level of production of the National List of Essential Medicines (NLEM) drugs and/or consumables for the next five years, as well as maintaining an absolute quantitative level of R&D spending for the next five years, etc.[4]
However, FDI upto 100% is allowed for the manufacturing of medical devices under the automatic route.
Foreign investors pursuing joint ventures in India’s pharmaceutical industry must examine the tax implications of their investment. Because the threshold for establishing a taxable presence in India is low, even a small investment in the country can result in taxation.
Even though the seller is not an Indian resident, the sale of shares in an Indian company is frequently taxed as capital gains in India. Capital gains and interest payments are taxed differently in India.
To decrease their tax liabilities, foreign organizations, and investors are frequently advised to invest through an intermediary jurisdiction.Numerous countries have signed double taxation treaties (DTAAs) with India. These DTAAs may include beneficial provisions for capital gains tax and interest withholding tax.
The legislations governing technology transfer and licensing in India are the Patents Act, the Copyright Act, of 1957, the Trademarks Act, and the Designs Act, of 2000. India is a signatory to several international intellectual property conventions, providing considerable protection for foreign contributors’ trademarks, copyrights, and designs.
Parties must follow all applicable legal responsibilities when transferring or licensing intellectual property rights. For example, when transferring trademarks, the licensor must ensure that the transfer does not result in exclusive rights to use the mark for the same categories of goods and services or similar descriptions of goods and services, which could lead to confusion or deception.
There are several challenges faced by Joint Ventures in the Indian Pharma Sector that might stymie their performance. Among these challenges are:
Joint ventures have been critical to the success of India's rapidly expanding pharmaceutical industry. The legal framework for joint ventures in the Indian pharmaceutical industry is made up of rules governed by Company Law, FEMA, and Intellectual Property Regulations. Approval and registration requirements, FDI rules, taxation, incentives, and technology transfer and licensing regulations are all part of the regulatory requirements for joint ventures.
Despite the challenges, the future for joint ventures in the Indian pharmaceutical business is positive. The Indian government has been developing policies to attract foreign investment in the healthcare business, and the expanding need for inexpensive healthcare presents an opportunity for joint ventures. Companies interested in joint ventures in the Indian pharma sector must invest in developing strong partnerships and communication channels, understanding local business practices and regulatory needs, preserving their intellectual property, and investing in workforce development. With this, joint ventures have the potential to be a win-win situation for both Indian and foreign partners.
Drafting a joint venture agreement in India’s pharmaceutical sector necessitates factors such as intellectual property rights, regulatory compliance, profit and loss sharing, management structure, and dispute resolution processes.
Yes, international companies can form joint ventures in India’s pharmaceutical sector. They must, however, adhere to India’s foreign investment restrictions and secure the relevant approvals.
In India, the tax implications of a pharmaceutical joint venture include corporate tax, withholding tax, and goods and services tax on transactions. The exact tax implications are determined by the structure and nature of the joint venture.
[1]https://www.ibef.org/industry/pharmaceutical-india.
[2]https://ipindia.gov.in/writereaddata/Portal/Images/pdf/Information_brochure-IPR__16_.pdf.
[3]https://dpiit.gov.in/sites/default/files/pn3_2011_1.pdf.
[4]https://dpiit.gov.in/sites/default/files/FDI-PolicyCircular-2020-29October2020.pdf.
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