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Limit on foreign capital in pharma firms raised to 74% - Views on News from Equitymaster
 
 
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  • Jan 7, 2000

    Limit on foreign capital in pharma firms raised to 74%

    The Cabinet Committee on Economic Affairs has approved the proposal permitting foreign investment upto 74% in bulk drugs, their intermediates and formulations.

    Investment above the level of 74% would be considered on a case by case basis in areas where investment is otherwise not forthcoming, particularly in the manufacture of bulk drugs from basic stages and bulk drugs produced by the use of recombinant DNA technology as well as specific cell/tissue targeted formulations.

    This move is a positive one since it will bring in further foreign direct investment in the bulk drug segment. It would bring in far greater competition in the segment. Further at some point in time the MNCs could leverage on the low cost advantage that India offers and use production facilities in India for supplying bulk drugs to their own plants abroad.

    However, the beneficial impact of the policy on the listed pharmaceutical companies would only be limited to those companies that donít want to cheat their shareholders. The fact remains that when pharmaceutical companies have the liberty to get approval for 100% subsidiaries (on a case by case basis of course) what would be the incentive for them to raise their stakes in the existing subsidiaries.

    For instance Pfizer and Smithkline Beecham both hold roughly 40% in their Indian listed subsidiaries but got permission for setting up 100% subsidiaries. Similar was the case with Novartis, which has a 51% listed subsidiary but does not want to raise its stake therein to 74% primarily because it has three 100% subsidiaries in India.

    Raising a stake in the listed company requires the foreign parent to buy shares at the average of the prices of the last six months. And this in quite a few cases would require higher capital investment than the setting up of 100% subsidiaries.

     

     

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