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Transfer of IP assets by pharma firms to abroad under scrutiny in India

Staff Writer | May 29, 2017
For years, many pharma companies in India have been moving their intellectual property (IP) assets — the firms' prized possessions — to offshore subsidiaries in destinations like Dubai, Ireland, Switzerland and the UK for strategic reasons or to lower, or even escape, tax.
India pharma
Pharma industry   Intellectual property assets
With all companies being required to file annual performance report on their overseas subsidiaries and joint ventures (JVs) with the Reserve Bank of India since last one year, the practice has come under the glare of the regulator.

The central bank has questioned the way these foreign subsidiaries have raised loans abroad to pay for the IPs that were transferred to them.

A transfer of assets from India has to be done at arm's length price to fulfill transfer pricing norms.

Typically, the loan raised by an overseas pharma subsidiary to pay for the asset is against guarantee or collateral given by the parent in India.

Such a transaction is unacceptable to the RBI, which believes it's in violation of Foreign Exchange Management Act (FEMA) and against the rules on external commercial borrowings (ECB).

In the past three months at least five pharma companies have been asked by the RBI to explain such transactions, two persons aware of the development told ET.

According to ECB rules, funds borrowed by an overseas arm against the Indian parent's support should be used for overseas expansion or takeovers — and cannot be sent back to India.