New Delhi: The finance ministry’s financial intelligence unit (FIU) has asked the Reserve Bank of India (RBI) to examine all foreign investments made in the medical devices sector under the automatic route after January 2015, when the foreign direct investment (FDI) policy for the sector was laid out.

A procedural oversight in the FDI policy governing investments in the sector as well as the definition of medical devices, has prompted the move.

According to the policy, 100% foreign investment was allowed through the automatic route for manufacturing medical devices in both greenfield and brownfield sectors. However, the definition of medical devices in the policy is based on what was proposed in the Drugs and Cosmetics (Amendment) Bill, 2013, which was withdrawn from Parliament in June 2016.

Interestingly, the need for a separate legislation for the medical devices sector was one of the reasons for the withdrawal of the draft legislation since there is no clear definition governing medical devices in the existing Drugs and Cosmetics Act, 1940.

There may be “larger issues involved" since the Drugs and Cosmetics Act, 1940 (amendment bill) has been withdrawn and the proposed definition of medical devices is “not effected in law", FIU said in a note to RBI and the department of pharmaceuticals on 20 October. Mint has reviewed a copy of the note.

“As it is different from the definition given under the extant Drug and Cosmetics Act, 1940, there may be instances on mis-representation, which may lead to companies availing automatic route... though they may not be strictly entitled to, given the scope of their activity, as is in the present case," FIU said in the note.

FIU’s comment was in connection with the proposed investment made by French biotechnology firm BioMérieux in India’s RAS Lifesciences, in which the former owned 60% and had proposed to raise its stake to 70%.

A person aware of the matter said BioMérieux’s investments in RAS may not be approved under the automatic route.

BioMérieux and RAS Lifesciences did not respond to detailed questionnaires sent by Mint.

The French multinational has asserted that it does not need approval from the Foreign Investment Promotion Board (FIPB) as the 10% investment in RAS Lifesciences was made after the government withdrew the requirement for an FIPB nod in the medical devices sector in January 2015.

RBI appeared to agree with the firm’s stance in a communication dated 2 August.

Earlier rules for FDI in the medical devices sector had three caveats—a “non-compete" clause except with the approval of FIPB, the requirement of a certificate along with the FIPB application by the investor and investee, and the right to incorporate appropriate conditions for FDI in brownfield investments. These three conditions were also rescinded when the FDI policy for medical devices was introduced in January 2015.

“While the assertion of the company is correct and it does not make sense in linking medical devices and pharmaceuticals sector, the regulation has been so worded that the definition of medical devices as given in the FDI policy/FEMA (Foreign Exchange Management Act) regulations would be applicable subject to amendment of Drugs and Cosmetics Act. We understand the Act is still to be amended. In such an event, FIPB approval would be required," RBI said in a letter to FIPB.

“However, we are of the view that since medical devices has been defined in the FDI policy and in the regulations, this particular condition may be deleted, so that in future FIPB approval may not be required for such cases irrespective of whether the Drugs and Cosmetics Act has been amended or not," it said.

Mails sent to RBI and the finance ministry did not elicit a response.

The implication of the anomaly is twofold—one, for any foreign investment made in the sector (post the FDI policy) to qualify under automatic route, the company’s activity should be confined solely to manufacturing of medical devices and not pharmaceuticals or brownfield pharma.

Two, as the proposed definition under FDI policy is different from the one in force, and defined, by law, there may be instances of firms availing the automatic route, which they may not be entitled to, owing to misinterpretation of the rules – deliberate or otherwise.

FIU has also advised the department of industrial policy and promotion (DIPP) to examine afresh the policy of foreign investment in medical devices, in consultation with the department of pharmaceuticals (DoP).

DIPP may also issue a corrigendum to the FDI policy of January 2015 so that the definition of medical devices as given in the extant Drugs and Cosmetics Act, 1940, is applied for availing benefit under FDI policy for medical devices, FIU said.