Change In Constitution' Under The Drugs & Cosmetics Act, 1940

I. Regulatory requirements with respect to 'change in constitution' under the DC Framework

While navigating through the regulatory framework governing the pharmaceutical industry in India for the purposes of deal-making, or from the perspective of running a business which requires a license under the Drugs & Cosmetics Act, 1940 and the Drugs & Cosmetics Rules, 1945 ("DC Framework"), an important aspect to be kept in mind is the requirement to make an intimation in case a 'change in constitution' occurs with respect to the license holder.

For context, licenses required for conducting any kind of business (inter alia manufacture, sale, distribution, import/export) relating to the pharmaceutical sector, are issued by the relevant authority under the DC Framework and contain certain conditions that must be adhered to by the license holder. One such key condition of the license is the requirement to provide an intimation to the relevant authority in case of change in constitution of the license holder. Further, the license issued under the DC Framework expires within 3 months of providing such intimation of change in constitution ("License Expiry Period") and a fresh license must be obtained by the license holder.

However, in spite of the ramifications on the capacity of license holders to conduct business if the fresh license is not issued by the end of the License Expiry period, the DC Framework does not include an applicable definition for change in constitution, leading to differing opinions on what triggers this intimation requirement. Would this requirement be triggered if the target is converting from private company to public company? Would any change in majority shareholding of the target tantamount to change in constitution?

II. Inclusion of 'change in constitution' definition in the MD Rules

The Medical Devices Rules, 2017 ("MD Rules") were introduced under the DC Framework, specifically to regulate the various kinds of medical devices in the market. Similar to the DC Framework, under the MD Rules, the licenses issued contain the requirement of intimation in case of change of constitution. However, the MD Rules include an applicable definition for change in constitution, which is as follows:

• For a firm, a change from proprietorship to partnership (including LLP or vice versa); and
• For a company, (a) conversion from private to public company or vice versa; (b) any change in ownership of shares of more than 50% of the voting capital in the body corporate; (c) in case of a body corporate not having share capital, any change in its membership; and (d) where the managing agent being a body corporate, is a subsidiary of another body corporate, includes a change in constitution of that other body corporate.

Further, a specific process has been provided in case of change in constitution, which provides 45 days to provide intimation, and 180 days to make the application for fresh license to the relevant authority under the MD Rules.

Certain FAQs issued by the regulator (found on www.cdsco.gov.in) have provided the above definition of 'change in constitution' for licenses issued under the DC Framework. However, the said definition has not specifically been added into the DC Framework and the timelines for the License Expiry Period have also stayed the same (i.e. 3 months). Considering the above, the applicability of the definition of 'change in constitution' provided under the MD Rules to the DC Framework is a matter of interpretation.

III. Practical challenges upon the occurrence of 'change in constitution' under the DC Framework

The absence of an applicable definition for change in constitution specifically under the DC Framework leads to a lack of clarity when:

1. changing aspects of the relevant business (such as inter alia change in name or change in directors);
2. undergoing restructuring (whether corporate or business); and/or
3. engaging in commercial transactions such as inter alia mergers, acquisitions and business transfers of the entire business or a part of the business.

Further, considering the licenses issued under the DC Framework expire by the end of the License Expiry Period (i.e. 3 months), this can be difficult for business owners inter alia in the following ways:

1. if the business includes manufacture and/or sale of different kinds of products (i.e. drugs, nutraceuticals or AYUSH products and/or medical devices), the licenses to be obtained under the DC Framework and MD Rules must be ascertained keeping in mind the different license requirements applicable to each product and the numerous fresh applications required to be made under the applicable legislation/rules;
2. if the business includes contract manufacturing from third parties, loan licenses are required. For new loan licenses, the applications require documentation from each contract manufacturer and a list of each product manufactured through such contract manufacturer;
3. if the business includes export/import activities, the fresh license may take more time than the License Expiry Period to come through, in turn affecting the ability of the business to continue commercial operations;
4. if the business includes clinical testing of drugs, each such drug required to be clinically tested for evaluation/commercial viability requires a separate license under the DC Framework. Any regulatory delay (beyond the License Expiry Period) in granting fresh licenses may lead to non-compliance under the DC Framework, leading the business to push commercial timelines and affect their operations; and
5. certain requirements under the DC Framework are interpreted differently from state to state, and the state-specific practices followed at the time of fresh application may require a business operating across different states to engage separate consultants in each of these states to ascertain regulatory requirements on a state-specific basis, leading to larger costs and delays in coordination.

Further, from the perspective of deal-making, investors must carefully scrutinize the business of their target to understand the kinds of products manufactured and/or sold (such as drugs, nutraceuticals or AYUSH products, medical devices etc.) and the manner in which the business is being undertaken (direct manufacturing and/or contract manufacturing, clinical tests, import/export of products and/or services) to firmly understand the regulatory requirements to be adhered to after assuming control of the target.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.