Tightening the norms, the government has done away with automatic approval of foreign direct investment (FDI) in the existing pharmaceutical companies.
For any merger or acquisition, the overseas investor will have to seek permission from Foreign Investment Promotion Board (FIPB).
After six months, it will be the monopoly watchdog Competition Commission of India (CCI) which will vet such deals.
The decision follows directions from Prime Minister Manmohan Singh who, along with his senior Cabinet colleagues, had deliberated on October 10 over concerns arising out of several acquisitions of domestic pharmaceutical companies by overseas firms.
FDI into the existing firms will be subject to the government approval. "FDI upto 100 per cent would be permitted for brownfield investments in the pharmaceuticals sector, under the Government approval route," a Department of Industrial Policy and Promotion (DIPP)
However, for the new investment 100 per cent FDI will be allowed under the automatic route, under which investors only inform the Reserve Bank about the inflows and no specific government nod is required.
DIPP said, the "decision will take immediate effect and would be reviewed after a period of six months".
The CII filter was suggested by a high level committee, headed by Planning Commission Member Arun Maira Concerns have been raised over the impact of a spate of acquisitions of homegrown firms by multi-national companies.
The recent acquisitions include Ranbaxy Laboratories by Daiichi Sankyo of Japan, Shanta Biotech by Sanofi Aventis of France and Piramal Health Care by Abbott Laboratories of US.
The affordability factor has so far been the hallmark of the Indian generic drugs all over the world, thanks to robust growth of the homegrown players.
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