Brief Overview of Indian Pharma Industry, Investement And Law

Introduction

India is popular known as the “Pharmacy of the World” perhaps the most appropriate title if one looks at the volume of production. As per the Annual report published by Department of Pharmaceutical; Indian pharmaceutical industry is the world’s 3rd largest by volume and 11th largest by value. The total annual turnover of pharmaceuticals is pegged at ₹4,71,898 crore for financial year (FY) 2024-25 and has grown at a CAGR of 9.5% since FY21.

Due to rapid growth, attractiveness, efficient and trained manpower and favorable government policy the sector attracts a decent size of FDI in India. The Government through its consolidated FDI Policy 2020 made sweeping changes by allowing upto 74% investment in brownfield projects under automatic route and 100% in green field project. FDI Policy 2020, allowed up to 100 percent foreign investment via automatic route in medical device sector.

During the period between April 2000 to June 2025 the sector contributed 3.8%of the total FDI inflow. The cumulative value of the inflow aggregating to ₹1,80,554 crore.[1]

The aim of this article is to provide a bird’s eyes view on the legal landscape surrounding the industry and common agreements executed by pharma companies in carrying out their business. The article shall traverse the specific FDI Policy, The Durgs and Cosmetics Act 1940 (including rules framed), import registration requirement and some of the common agreement and clauses that are particular to Pharma Industry.

THE GENESIS

The Drug and Cosmetic Act 1940(“Act”) And Drug and Cosmetic Act 1945(“Rules”) provide an overarch regulatory framework governing the Pharma Industry. The Act is divided into 5 Chapters and has 2 Schedules. The Act define what is standard quality, Misbranded drugs, Adulterated drugs, Spurious drugs, Misbranded cosmetics and Spurious cosmetics. Further it prescribes prohibition of import of certain drugs or cosmetics and establishment of Drug Technical Advisory Board to aid and advise the government on any challenges pertaining to administration of the Act.

Under Section 18 a Manufacture as define in clause 3(f) is restricted from sale of any drugs which is not of a standard quality, or is misbranded, adulterated or spurious[2]. Further under section 34 any person who is at the helm of affair of the company at the time the offence was committed shall be liable under the Act unless he proves the offence was committed without his knowledge.

The rigour of section is itself evident of the government sensitivity to the subject and high degree of responsibility being placed on the Manufacture to ensure their activities are within the bound of the Act. Under section 27 (a) the Manufacture if found guilty for contravention of Section 17A &17B i.e. for sale of spurious/ adulterated drugs it’s made punishable with imprisonment for the term which shall not be less than 10 years but may extend to life imprisonment and fine of Rs 10 lakhs which may extend to 3 times the value of drugs confiscated.

Interestingly the provision to sec 27(a) which was inserted by an amendment i.e. Act 26 of 2008, s. 6(i)(C) (w.e.f.10-8-2009) the person convicted under this section shall be liable to pay by way of compensation to the person who are affected by the use of such adulterated/ spurious drugs.

The Act provides under Section 32B for compounding of offence that are punishable on with fine. The Cognisance of the offence shall be taken by court not inferior to Judicial Magistrate First Class or Metropolitan Magistrate on basis of report submitted by the Inspector.

IMPORT LICENSE & REGISTRATION

The Rules that supplement the Act is comprehensive and divided into XIX parts along with Annexure and Schedules. It provides for detailed guideline for storage, sale and manufacturing of drugs. A manufacture who is desirous to import any drugs in India has to make an application in Form 8A under Chapter IV of the Rules for obtaining the Import License.  A manufacture must have a valid import license in Form 10A for drugs provided in Schedule X and in Form 10 for drug not covered by the schedule. Before making any application for import license the manufacture must obtain the registration certificate which is to be annexed to application Form 8A by complying with the procedure prescribe Rule 24A. Additionally the grant of import license is subject to condition provided in Rule 25A which interalia provides for i) the details of the premises for storage and ii) the business carried out by applicant

All fees are to be paid through a Challan in the Bank of Baroda, Kasturba Gandhi Marg, New Delhi-110001 or any other branch or branches of Bank of Baroda, or any other bank, as notified, from time to time, by the Central Government, to be credited under the Head of Account ―0210-Medical and Public Health, 04-Public Health, 104- Fees and Fines.[3]

CASE LAW AT POINT – SECTION 34 VICARIOUS LIABILITY OF THE COMPANY/MANAGEMENT.

1. ROSHAN LAL GOYAL & ORS V. STATE OF JHARKHAND & ANR 2022 SCC ONLINE JHAR 1175-

A complaint was filed by the drug inspector alleging that the sample of Paracetamol syrup I.P, B. No. ML12-017 was found not of standard quality as the oral liquid was not homogenous. The major issue highlighted was whether the company being made an accused in the complaint is vicarious liable or not?

The Court observed that there is no averment as to what are the role played by these petitioners who happened to be Directors of the said company. If the company is responsible it has to be made a party and consequently the criminal complaint was quashed.

2. Swiss Garnier Life Sciences and Others v. Union of India 2022 SCC OnLine J&K 857

The major issue in the case was can re-analysis of the sample be done or insisted once the same was done confirmed by the Central Drugs Laboratory to adduce evidence in against the report.

The court opined that once the report of the Central Drugs Laboratory was received, there was no provision for the re-analysis of the sample and, as such, the respondent Drugs Inspector had no obligation to give opportunity to the petitioners to adduce evidence in against the said report.

FDI IN PHARMA AND PERSPECTIVE

FDI is considered as a major source of non-debt financial inflow that contribute to the development of Indian economy. The inflows are crucial for supporting research and development, innovation, and employment opportunities etc. The consolidated FDI policy is one such attempt by GOI to ensure transparency, and easy procedural formalities.

Under the Consolidated FDI Policy 2020, investment can be made by a non-resident person in the equity shares/fully, compulsorily and mandatorily convertible debentures/fully, compulsorily and mandatorily convertible preference shares of an Indian company, through the Automatic Route or the Government Route.

Under the Automatic Route, the non-resident investor or the Indian company does not require any approval from Government of India for the investment. Under the Government Route, prior approval of the Government of India is required.

Any non- compete clause shall not be allowed in automatic or government approved route. Additionally, the Government may impose certain condition on the brownfield projects and investment shall be subject to condition like 1) Maintenance of production level of drugs on National List of Essential Medicine and 2) R&D expenses both being maintained at certain level for five-year post date of the FDI.

CUMULATIVE FDI EQUITY INFLOW IN DRUGS & PHARMACEUTICALS SECTOR:

CUMULATIVE FDI EQUITY INFLOW (remittance-wise) received during January, 2000– December 2024 were INR 46,90,830.10 crores (USD 720.20 billion). Out of this, the amount of FDI equity inflow in the Drugs & Pharmaceuticals Sector during January, 2000 to December, 2024 is INR 1,41,763.34 Crore (USD 23.37 billion) which is 3.24% of the total FDI equity inflow.

SUB SECTORS OF FDI EQUITY INFLOW IN DRUGS & PHARMACEUTICALS SECTOR

Apart from the traditional investment route a 2-way fungibility scheme is also introduced by the GOI for the issue of ADR/ GDR. Likewise, an Indian entity can also sponsor the ADR/GDR where in the proceed is remitted to the resident investor.

IMPORTANT AGREEMENT UNDER PHARMA INDUSTRY

The Pharma business is heavily reliant on license production of goods and its common for the company to outsource the production to achieve economics of scale. Apart from the statutory framework under FEMA (Non-debt Instrument) Rule 2019, FDI policy, and press note issued by sectoral regulator an innate understanding of the common type of Agreement executed in the pharma industry will help a reader/lawyer to better understand the commercial dynamic of the business.

The attempt here is to give a brief summary of common type of Agreement; followed by important clause being discussed and replicated for the reader’s understanding.

1. License Agreement

License Agreement is executed between two parties i.e. drug company and a pharmaceutical laboratory wherein the fund is provided for research and manufacturing of compounds. The final product shall subscribe to specific restriction for e.g. US FDA norms etc. Once the sample is tested and pass the quality test a supply agreement is executed between the lab and the drug company to buy/sell on commercial quantity level.

2. Product supply agreement

The Agreement is executed between the Supplier and buyer either on basis of exclusive marketing/distribution of the good under the brand name/compound within a geographical jurisdiction. The Agreement contains important clause about ownership of drug/compound and volitation of terms and condition of the Agreement.

3. R&D Agreement

Pharma company enter into R&D agreement to leverage important technical strong points and collaborative effort to design new drugs. For e.g  Covaxin, India’s first indigenous COVID-19 vaccine, was jointly developed by Bharat Biotech International Limited (BBIL) and the Indian Council of Medical Research (ICMR) involving joint R&D.

4. Technology Agreement

Under this agreement a Major pharma company provides the technology apparatus to supplier to ensure the quality standard. Usually, important equipment’s are transferred to lab for large scale production of drugs.

GENERA CLAUSE UNDER CONTRACT

While drafting care must be taken to understand all the regulatory requirement, cross border implication and any specific quality standards. Draft must provide for proper representation and exit and termination ensuring potential disputes are avoided due to simple oversight.

1. Recital

The recital is the introductory party that must bring forth the capability of the party undertaking production or supply of drugs. Recital though not used for direct interpretation of the agreement it sets the expectation and help the court to decipher obfuscate term if need arises.

Example

“ XYZ is a company that has developed substantial expertise in manufacturing polyunsaturated fatty acids, including the Compound (as defined herein), for use in nutritional supplement and pharmaceutical products”.. here the specific emphasis is on manufacturing expertise

2. Definition

Though this is often most overlooked part while drafting the Agreement, care must be taken to ensure defined term are as per the industry specific guidelines. To name a few the term “Control” is defined in India under SEBI takeover code, affiliate/holding/subsidiary is defined under the Companies Act 2013. Another example can be “Good quality manufacturing practice” this can be with regards to quality standard set by U.S. Current Good Manufacturing Practices or subject to Indian law. Ownership of IP and IP definition also need careful attention a standard term may do more damage in dispute that often ignored.

3. Manufacturing, Sale and Purchase of API/Drugs

The Agreement provides for the time line for the manufacturing of drugs and testing. Here the parties have to negotiate minimum purchase requirement and supply standard. Pharma company must be careful not to commit on purchase of all its API requirement. If any commitment is given to procurement of minimum quantity the same shall be subject to quality standing and passing. If the sample fails the right to refuse delivery must be built in. In the same clause restriction must also be put on the laboratory not to sell the same API and purity to any other third party.

Example: Manufacturing of API clause:

“Subject to the terms and conditions of this Agreement, XYZ agrees to manufacture API at the Facility for sale to PQR. XYZ may not manufacture API at locations other than the Facility without the prior written Consent of PQR, such Consent not to be unreasonably withheld or delayed and as provided in the Quality Agreement. For the avoidance of doubt, the Parties agree that this Agreement does not obligate PQR to purchase all of its requirements of the API from XYZ, nor does it obligate PQR to purchase any particular volumes of API from XYZ except as expressly set forth herein, nor does it obligate XYZ to sell the API exclusively to PQR except ….PQR retains the right to engage or appoint additional suppliers and contract manufacturers of the API from time to time in its sole discretion and XYZ retains the right to supply API to Third Party customers and to appoint Third Party distributors of the API from time to time in its sole discretion.

4. Financial

The cost for the supply of API must be based on the forecast/ requirement and must be fixed for the term of the Agreement. If required separate schedule be made for ease of understanding. The Pharma company must carefully look into any price adjustment that may be required to absorb supply-side shock for e.g. War, and care must be taken to provide for all  contingency in the Agreement.

5. Third party material and Quality assessment

Obligation must be put on the laboratory to inspect and test all third party material required for the manufacturing of the drugs. If required separate Quality agreement must be executed.

Example

XYZ shall be responsible for procuring, inspecting, testing and releasing adequate Third Party Materials that comply with cGMP and this Agreement as necessary to meet a Purchase Order for API. XYZ shall perform all testing of Third Party Materials required by the applicable API Specifications, cGMP, Legal Requirements, this Agreement and the Quality Agreement.

 6. Testing and revocation of Acceptance

The Pharma company must ensure that the drug must be thoroughly be subject to test and product may be reject if it do not pass the testing criteria.

Example: Rejection and Revocation of Acceptance.

 PQR may test or cause to be tested the API delivered by XYZ for a Nonconformity or reasonably suspected Nonconformity. During such testing, at PQR’s reasonable request, XYZ shall provide appropriate analytical reference standards for such testing to PQR or its designee. If any customer of PQR wishes to hold the API delivered to it by XYZ for investigation of a Nonconformity or reasonably suspected Nonconformity, PQR shall so notify XYZ stating the basis for the hold. If parties disagree the same be subject to a third-party independent testing.

7. Force Majeure

Care must be taken adapt the clause to the industry standard and standard term template must be avoided.

Example: Force Majeure

Except for any obligation to pay money, neither Party shall be held liable or responsible to the other Party nor be deemed to be in default under, or in breach of any provision of, this Agreement for failure or delay in fulfilling or performing any obligation of this Agreement when such failure or delay is due to a Force Majeure Event, and without the fault or negligence of the Party so failing or delaying. For purposes of this Agreement, a “Force Majeure Event” is defined as: acts of God; war; civil commotion; destruction of production facilities or materials by fire, flood, earthquake, explosion or storm; labor disturbances; epidemic; failure of public utilities and similar events which are beyond the reasonable control of the Party affected…

8. Termination

Right to exit from the agreement is important and crucial to avoid any damages being paid due to breach. Termination right can be caused based due to specific failure or for convenience. Caused based right must cover all potential scenarios that can be factored at the time of drafting of the Agreement

Example- Termination

PQR may terminate this Agreement upon thirty (30) days’ written notice to XYZ if PQR, in its sole and absolute discretion, discontinues or indefinitely suspends the development and/or commercialization of the Product. Upon the termination of this Agreement pursuant to this Section… PQR’s sole obligation shall be for it to reimburse XYZ for all documented direct costs and expenses properly and reasonably incurred by XYZ pursuant to this Agreement up to the effective date of such termination in connection with PQR’s then-outstanding obligation to purchase quantities of API forecasted with respect to the binding portion of the forecast.  XYZ shall use commercially reasonable efforts to mitigate such costs and expenses by cancelling any cancelable orders for Third Party Materials, returning returnable Third Party Materials, and/or using non-returnable Third Party Materials for its own or its other customers’ behalf.

CONCLUSION

The main constraint for the future of Indian Pharma Industry is to be self-reliant and reduce dependency on API import from China. To support this GOI has introduced production-link incentive scheme which has resulted in job creation and exceeding the original target. To add to this dynamic innovation, with global market access by concluding trade agreement, reducing tariff, greater integration with global supply chain will go a long way ensuring the Indian Pharma Industry remains competitive and toward upward growth trajectory.

Notes:

[1] https://pharma-dept.gov.in/annual-report

[2] //efaidnbmnnnibpcajpcglclefindmkaj/https://cdsco.gov.in/opencms/export/sites/CDSCO_WEB/Pdf-documents/acts_rules/2016DrugsandCosmeticsAct1940Rules1945.pdf

[3]efaidnbmnnnibpcajpcglclefindmkaj/https://cdsco.gov.in/opencms/export/sites/CDSCO_WEB/Pdf-documents/acts_rules/2016DrugsandCosmeticsAct1940Rules1945.pdf

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