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A Complete Overview of FEMA Compliances for the Pharmaceutical Sector

A Complete Overview of FEMA Compliances for the Pharmaceutical Sector

With India’s huge involvement in the worldwide market in the pharmaceutical sector, FEMA Compliances for the Pharmaceutical Sector referred to as FDI rules, that regulates the transactions and maintain a working market. With the high demand for essential drugs, these compliances play a significant role. 

Foreign Exchange Management Act, 1999 

Enacted by the parliament in 1999, the Foreign Exchange Management Act deals with foreign exchange and external trade and payments for the upliftment of the foreign exchange market in India. FEMA is a regulatory mechanism that enables the Reserve Bank of India to pass regulations and the Central Government to pass rules relating to foreign exchange in tune with the Foreign Trade policy of India. FEMA was established in place of FERA, Foreign Exchange Regulation Act, to relax controls on the foreign exchange in India. FEMA Compliance for the Pharmaceutical Sector is just a part of the whole body. 

Objectives of FEMA 

Dealing with the foreign exchange markets, FEMA outlines the formalities and procedures for dealings of all foreign exchange transactions in India. There exist Capital Account Transactions and Current Account Transactions.Facilitating and promoting foreign trade was the main aim of introducing firstly FERA and then FEMA. It revolves around trades, inflow and outflow of currencies to and fro between countries.   

FEMA Compliances 

In regulating the flow of currency, FEMA has established certain conditions known as FEMA compliances that a body has to follow. These compliances help achieve a smoother functioning of cross-border transactions, transparency in transactions and increased investments. 

Reserve Bank of India is the primary regulating authority while the Companies Act and SEBI laws also apply to the same. 

Globalization has made international investment achieve a faster pace making FEMA compliances much more relevant and favorable. With its expanding market, FEMA Compliances for the Pharmaceutical Sector have also seen its rise. 

FEMA and Pharmaceutical Sector 

India acquires a major share of the world’s pharmaceutical sector. With more than 30% worldwide demand for generic medicines and vaccines, India has a sizeable international market. This international market created is where the FEMA compliances for the pharmaceutical sector come into action. FEMA also specifies certain regulations for Foreign Direct Investment for the Indian companies. 

Following the amendment made through the Finance Act, of 2015, the Central Government has the power to legislate the Capital Account Transactions. With this amendment, Foreign Exchange Management (Non-debt Investment) Rules, 2019 was introduced for regulating foreign transactions. These were further referred to as NDI Rules for Foreign Direct Investment in India. Foreign investment in India is as specified in the given NDI rules. 

FDI in Pharmaceuticals 

With this reason of multiplied pharmaceutical market, FDI has been allowed to 100% in the pharmaceutical sector in Greenfield and Brownfield. The said permission is provided in Schedule 1 of the NDI Rules. According to which, the entry route for Brownfield is 74% under the automatic route in FDI with the rest 26% under the government route. Whereas, for Greenfield, 100% is under automatic route. Greenfield means the construction of new production and operational facilities from the ground up, including industrial licenses and Brownfield means existing and living plants. Conditions applicable to Greenfield and Brownfield investments are given below-  

  • Under both investments, the non-compete clause would be permitted only under specific scenarios with the approval of the government. 
  • The investors and investees are to submit the details of the agreements in form of a Certificate that has been pre-determined format. 

Conditions applicable only on Brownfield investment-  

  • Maintenance relating to research and development expenditures should be maintained for five years. The level of R&D here would be quantitative and of the highest level. Benchmark would be the expenses as of the last three years preceding the year. 
  • Maintenance of production and supply of drugs from the National List of Essential Medicines has to be maintained for the next five years with the benchmark as the highest production in the preceding three years, before the orientation of overseas investment.  
  • Administration of the compliance of conditions should be executed by any regulator as notified by the Central Government such as the Department of Pharmaceuticals and Ministry of Health & Family Welfare. 
  • Details of technology transfer should be informed to the Administrative Ministry. 

FEMA Compliances for the Pharmaceutical Sector 

Following are the FEMA Compliances for the Pharmaceutical Sector-  

Compliances related to Pricing 

  • Listed company – prices as decided by SEBI[1]
  • Unlisted company – prices as accepted by any internationally accepted methodology. 

Compliances related to reporting 

  • Form Foreign Currency – Gross Provisional Return (FC-GPR): An Indian-based organization granting equity instruments to PROI, within thirty days from the issuance date of the equity. 
  • Annual Return on Foreign Liabilities and Assets (FLA): An Indian-based organization, which has received overseas funding or an LLP which has secured Foreign Investment shall report to the reserve bank by the 15th of July of each year.  
  • Foreign Currency – Transfer of Shares (FC-TRS): On disinvestment/transfer of capital contribution/profit share between PRI and PROI, it should be filed within 60 days from the receipt of funds. 

Conclusion – FEMA Compliances for the Pharmaceutical Sector

With its huge contributions and advancements, India has captured the pharmaceutical sector in the market worldwide. FEMA Compliances for the Pharmaceutical Sector, referred to as the FDI rules are what the investors are to follow. It may be compulsory or at discretion as in Greenfield and Brownfield investments. FEMA Compliances for the Pharmaceutical Sector is what one is supposed to abide by to achieve a good build and regulated market. For further clarifications, one can always contact Bizadvisors.

Read our article:A Complete Guide on Foreign Direct Investment Compliance under FEMA

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