Foreign Direct Investment has played and is still playing a crucial role in shaping India’s healthcare and pharmaceutical sectors, driving growth, innovation, and accessibility. With a rapidly expanding market for medical products and increasing healthcare demands, the Indian government has framed specific FDI policies to regulate and encourage investment in medical industry. This article provides an overview of the FDI policy governing medical players in India, analyzing the regulatory framework, approval mechanisms, and key conditions imposed on foreign investors.
BUSINESS MODEL
1. Retail Model: Medical wholesalers act as intermediaries between manufacturers and retailers, supplying bulk pharmaceutical and healthcare products. This model benefits from economies of scale, lower procurement costs, and higher margins. Wholesalers must comply with stringent regulations, including licensing, drug storage norms, and distribution guidelines.
2. Wholesale Model: Medical retailing involves direct sales of pharmaceuticals, medical devices, and healthcare products to consumers. This model includes standalone pharmacies, hospital-attached stores, and e-pharmacies. With increasing healthcare awareness and online pharmacy growth, the retail sector offers promising opportunities.
FDI POLICY ANALYSIS
FDI Policy 2020 applies in consonance with multiple rules and regulations under Foreign Exchange Management Act. For the purposes of this article, we would be focussing on FEMA (Non-Debt Instrument) Rules, 2019 [“NDI Rules”]. The essential provisions include:
1. FDI in Wholesale Trading: Clause 15.1 of Schedule I of NDI Rules, 2019 allows 100% FDI through Automatic Route for Cash & Carry Wholesale Trading activities which is defined as sale of goods or merchandise to retailers, industrial, commercial, institutional or other professional business users or to other wholesalers and related subordinated service providers and also implies sale for the purpose of trade, business and profession, as opposed to sales for the purpose of personal consumption. Wholesale trading also includes resale, processing and thereafter sale, bulk imports with export/ex-bonded warehouse business sales and B2B e-Commerce.
However, the 100% investment threshold is subject to several conditions as provided in provided under Clause 15.1.2:
a) All requisite licenses/registration should be necessarily obtained;
b) Except in cases of sales to Government, valid wholesale trading in conducted only when sale is made to the following entities:
i. Entities holding sales tax/ VAT registration/ service tax/ excise duty/ GST registration;or
ii. Entities holding requisite trade licenses;or
iii. Entities holding permits or license etc. for undertaking retail trade; or
iv. Institutions having certificate of incorporation or registration as a society or registration as public trust for their self-consumption.
c) Full records of sales shall be maintained on a day-to-day basis;
d) WT shall be permitted among companies of the same group with the total business to group companies capped at 25% of the total turnover of the wholesale venture;
e) WT can be undertaken as per normal business practice, including extending credit facilities;
f) A wholesale or cash and carry trader can undertake single brand retail trading (SBRT) under the conditions mentioned in Clause 15.3:
i. An entity undertaking wholesale as well as retail business shall maintain duly audited separate books of accounts for the two different businesses.
ii. Conditions for wholesale and retail business shall be complied with separately.
2. FDI in Retail Trading: Retail trading is subject to stricter regulations which are discussed below:
A. Single-Brand Retail Trading (SBRT): As per Clause 15.3 of Schedule I of NDI Rules, 2019, 100% FDI is allowed in SBRT sector. However, the same is capped at 49% under the Automatic Route, and requires prior government approval on breach of the 49% threshold. The following conditions apply:
a) Products sold must belong to a single brand which must be sold under the same name in one or more countries outside India and the products should be branded during the manufacturing process.
b) A foreign resident, whether the brand owner or not, may undertake SBRT in India for a specific brand. This can be done either directly by the brand owner or through a legally tenable agreement between the brand owner and the Indian entity conducting SBRT.
c) Local Sourcing Requirements for FDI Beyond 51%:
i. If FDI exceeds 51%, the entity must ensure that 30% of the value of goods procured is sourced from Indian MSMEs, village and cottage industries or artisans and craftsmen across all sectors.
ii. For the first five years of business operations, the 30% local sourcing requirement is calculated as an average of the total value of goods procured during this period, beginning 1st April of the year of commencement of SBRT operations.
iii. After the initial five years, the local sourcing norm must be complied with on an annual basis.
iv. Sourcing of goods from India for global operations may be set off against the 30% sourcing requirement during the initial five years.
d) The entity must self-certify compliance with the sourcing norms and such self-certified compliance will be subject to verification by the entity’s statutory auditors based on duly certified accounts.
e) SBRT entities that operate physical stores are allowed to conduct business through e-commerce. The same can be done even before opening physical stores, provided that brick-and-mortar stores are established within two yearsof starting e-commerce operations.
B. Multi-Brand Retail Trading (MBRT): Any medical entrepreneur looking to open multi-brand stores for healthcare products would come under this category. The requirements are different for MBRT businesses which are provided in Clause 15.4 of Schedule I of NDI Rules, 2019. FDI is capped at 51%, which is permitted only under the Government Approval Route. The following conditions are applicable:
a) The MBRT entity must ensure a minimum investment of USD 100 million and at least 50% of the total FDI received in the first tranche of USD 100 million must be invested in back-end infrastructure within three years.
b) At least 30% of the total value of goods purchased must be sourced from MSMEs which have a total investment in plant and machinery not exceeding USD 2 million, farmer cooperatives, or agricultural cooperatives. Sourcing must be met as an average over five years, starting from the first financial year when the investment is received. Thereafter, compliance must be ensured annually.
c) The entity must self-certify compliance with the mentioned conditions and such self-certified compliance will be subject to verification by the entity’s statutory auditors based on duly certified accounts.
d) Retail outlets may only be established in cities with a population of more than 10 lakh, based on the 2011 Census. Retail outlets can cover areas within 10 km of municipal or urban agglomeration limits of the selected cities. Outlets must adhere to city zoning regulations, such as Master or Zonal Plans, and provide requisite facilities such as transport connectivity and parking.
e) The MBRT policy provides that individual States or Union Territories have the authority to decide whether to permit foreign investment in MBRT. Establishments must adhere to relevant State/UT regulations, such as the Shops and Establishments Act.
f) Entities engaging in MBRT with foreign investment are prohibited from conducting retail sales through e-commerce platforms.
CONCLUSION
The NDI Rules provide a starting point for people looking to enter the medical wholesale and retail business. While there are several other compliances that should be fulfilled by an entrepreneur looking to bring in foreign investment, this article aims to provide a detailed overview on the basic requirements that should be fulfilled before any other rules/regulation becomes relevant.