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Non-Compete Clauses only in Special Cases in Pharma FDI

Jan 10, 2014 14:55 IST

Department of Industrial Policy and Promotion (DIPP) on 8 January 2014 issued a press note that restricts the use of non-compete clauses. The freshly issued press note has restricted use of non-compete clauses in both Greenfield and Brownfield projects. This action is believed to be a restrictive action.

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The DIPP has retained the existing FDI policy in pharmaceutical sectors. This note has declared that the non-compete clauses would be allowed only in special conditions with the approval of the Foreign Investment Promotion Board. It means that foreign investors in Indian pharmaceutical company cannot sign non-compete agreement with promoters of these companies in most of the situations.

The present FDI Policy allows 100% Foreign Domestic Investment both in Greenfield (automatic route) and Brownfield (approval route) pharmaceutical projects. Some conditions can still be imposed on Brownfield projects, while granting approvals.

In November 2013, DIPP proposed reduction in the FDI cap to 49 percent from 100 percent in critical pharma verticals. This proposal was laid by DIPP because of a significant increase in acquisition of Indian pharma companies by the multinational companies. These large scale acquisitions can adversely impact availability and price of generic medicines in the country. But, this proposal was rejected by the Union Cabinet and it was decided to use the current FDI policy. Cabinet however, imposed an additional condition that non-compete clauses in any mutual agreement will not be permitted in the Brownfield projects

The non-compete clause is a standard feature of mergers-acquisitions. This clause restricts a party from competing with a business after termination of employment or completion of a business sale for a fixed time. For instance, when Abbott Laboratories acquired Piramal Healthcare’s domestic formulations business, it signed an 8 year non-compete agreement.  This agreement prohibited promoters of Piramal Health care to enter into similar business for 8 years. This duration of fixed period can be different from one agreement to another. It is not necessarily 8 years for all non-compete agreements.

Other examples of use of non-compete clauses are
• Daichi Sankyo acquired Ranbaxy in 2008 with non-compete agreement of 2 years.
• Mylan acquired Agila Specialties pvt ltd in 2013 with non-compete agreement of 4 years.

Experts said that this note had sent confusing signals to the foreign investors. They believed that a framework defining more clear guidelines for the Brownfield projects is need of the hour.

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