For years, several Indian pharma companies have been moving their prized possessions of intellectual property (IP) assets to offshore subsidiaries in destinations like Dubai, Ireland, Switzerland and the UK either for strategic reasons or to lower or escape taxes.
However, since last one year all companies are required to file annual performance report on their overseas subsidiaries and joint ventures (JVs) with the Reserve Bank of India (RBI), which has led to this practice of offshore transfer of IP assets come under the RBI radar.
The central bank has raised questions about these foreign subsidiaries having raised loans abroad to pay for the IPs that were transferred to them.
To fulfil transfer pricing norms, a transfer of assets from India has to be done at arm’s length price. Typically, an overseas pharma subsidiary raises loan against guarantee or collateral given by its Indian parent.
However, RBI has said that it won’t accept such transactions, adding that it violates Foreign Exchange Management Act (FEMA) and is against the rules on external commercial borrowings (ECB).
In the past three months, RBI has enquired with at least five pharma companies about such transactions, two persons in the know told ET .
ECB rules say that funds borrowed by an overseas arm against the Indian parent’s support cannot be sent back to India and have to be used for overseas expansion.
In pharma business, IP involves everything that can give revenue when monetised, be it new drug applications (NDA), abbreviated new drug applications (ANDA), 505(b)(2) NDA, or product dossiers and so on.