The last year has seen increased traction in the e-pharmacy space. With Covid-19 and lockdown driven demands, epharmacies received increased customer attention for their pharmaceutical and medicinal supplies. Despite several significant investments (some external reports suggest this industry segment in India is poised to cross USD 18 billion in a couple of years), this sector has been prone to legal controversy, including whether e-pharmacies are legally permitted at all.
From an investor's perspective, such lack of certainty – including clarity on the applicable regulatory regime and permissibility of FDI – can be a clear damper and negatively impact the sector's growth prospects. In this background, this note analyzes some of the regulatory considerations pertinent to investors in this sector.
The vaccination drive in India has been consistently gaining scale, providing a sense of relief to our frontline workers, elderly and those with co-morbidities. A big section of those eligible have successfully scheduled their appointments after providing relevant details electronically, either through the Aarogya Setu app or the Co-Win website online. At the same time, periodically there have been reports of glitches and errors on these electronic platforms.
In this background, we look at the question of how legally secure an individual's electronically collected vaccination related data is, and who might be liable for any leak or loss of such individual's information.
- Debate over Regulation: For several years it
has been contended by brick-and-mortar pharmacies and medical
practitioners, that e-pharmacies or online pharmacies not only fall
foul of Indian regulations but also create risks for the end
customer stemming from forged prescriptions, exploitation of
prescription drugs and the like. In addition, questions arose on
whether e-pharmacies need to be licensed/registered and which
authority would regulate their activities.
As far back as 2015, the Office of Drugs Controller General of India recognized the concern and indicated a detailed evaluation would be required of the e-pharmacy regime. In the interim, it issued an office order (dated December 30, 2015, bearing reference No.7-5/2015/Misc/e-Governance/091) to state authorities, stating inter alia '...you are requested to put a strict vigil on online sale of medicines and take action against those indulging in online sale of medicines in violation of the Drugs and Cosmetics Act and Rules thereunder, in the interest of public health'. (emphasis supplied)
Presently, the vexed issued of regulatory clarity remains pending on two fronts.
- Firstly, before high courts of the country owing to interim orders in matters such as Dr. Zaheer Ahmed v Union of India1 and Practo Technologies v Tamil Nadu Chemists and Druggists Association2. The two honorable courts took conflicting positions on online sale of drugs, with the Delhi High Court prohibiting the same while the Madras High Court allowing the same till the government brought into effect its rules on e-pharmacies.
- Secondly, the pending formalization of draft rules governing e-pharmacies, first notified in 2018 (Ministry of Health and Family Welfare, GSR 817(E) dated August 28, 2018) and intended to be an amendment to the Drugs and Cosmetics Rules, 1945 (Rules) vide insertion of a proposed Part VIB (Draft Rules).
- Need for License: There has been debate
aplenty on whether e-pharmacies have the same business and
operational model as traditional pharmacies. It may be noted that
pending the Draft Rules, there is no statutory definition of
'e-pharmacy' either under the Drugs and Cosmetics Act, 1940
(1940 Act) or even the Pharmacy Act, 1948 (1948
Act). The 1948 Act has only a definition of
'registered pharmacist' (Section 2(i)), being: '...a
person whose name is for the time being entered in the register of
the State in which he is for the time being residing or carrying on
his profession or business of pharmacy'. The only derivation
from this would be that a pharmacist should not operate without
specialized regulatory oversight. A similar outlook presents itself
through the 1940 Act as well. In this regard, reference may be made
to Section 18 therein, relevant excerpts of which provide that
'...no person shall himself or by any other person on his
behalf...' as well as '(c) manufacture for sale or for
distribution, or sell, or stock or exhibit or offer for sale, or
distribute any drug or cosmetic, except under, and in accordance
with the conditions of, a license issued for such purpose under
this Chapter...' (emphasis supplied).
From the above, it can be inferred that under present law (pre-Draft Rules), any internet-based platform that sells, stocks or exhibits, or offers for sale or even distribute any drugs, would attract license requirements. Whether it creates its own inventory and supply chain, provides a distribution channel as a service to registered pharmacies as a service, or is simply a marketplace platform for other registered pharmacies, a contention for license (such as through Forms 20, 21 and the like under the Rules) under the 1940 Act could be made.
It may be noted that in 2015, the regulatory dictum was not a blanket abolition of online sale of drugs, but action against those who undertook such activities in violation of the 1940 Act. Even the subsisting Order of the Drug Controller General of India dated November 28, 2019, that emanated pursuant to the aforementioned Delhi High Court decision, was prohibition of unlicensed online platforms till Draft Rules are effected, rather than a blanket prohibition on all online platforms.
A look at the Draft Rules provides 2 relevant definitions, which are 'e-pharmacy' and 'e-pharmacy portal'. The former is defined as 'a business of distribution or sale, stock, exhibit or offer for sale of drugs through web portal or any other electronic mode' while the latter is defined as 'a web or electronic portal or any other electronic mode established and maintained by the e-pharmacy registration holder to conduct business of e-pharmacy'. Once brought into effect, the above clarity will be of help to the sector. At the same time, it must also be noted that the Draft Rules also mandate the registration of e-pharmacies, with the difference that the same would be under proposed Form 21AA instead of the older forms under the Rules.
- FDI in E-Pharmacy: A prospective foreign investor who wishes to undertake FDI in the e-pharmacy space (whether present day or after the new regime discussed above comes into effect) should validate that the investment is more likely in the 'trading' sector rather than the 'pharmaceutical' sector. If trading, it would likely fall under 'ecommerce' (unless housed in an entity that undertakes other business activities requiring separate evaluation). This distinction is important because while technically both spaces allow for 100% FDI limit, there are nuanced conditions and restrictions in both. Under the extant FDI regime, 'e-commerce' is understood as '...buying and selling of goods and services including digital products over digital & electronic network'. This itself has 2 classifications, being 'inventory-based model' and 'marketplace-based model'. Reports indicate that there are both models of e-pharmacies in operation today, and knowing with considered detail which business model is used would be important. This is because FDI in inventory-based model is prohibited and the marketplace model has detailed conditions that need to be fulfilled for the FDI to be compliant. Formulation of a business and legal structure that makes the investment viable is important in this regard.
There are multiple takeaways that are important. From an operational perspective, having the Draft Rules become part of the Rules would lend clarity. Given how the existing regime does not have a blanket prohibition on online sale of drugs but unlicensed online sale of drugs, the licensing/registration regime needs to be streamlined better in legislation. This may require not just the e-pharmacy specific insertions from the Draft Rules but also other tweaks at least in the Rules to exclude e-pharmacy business from the generic registration requirements. In addition, FDI should take place in a compliant marketplace model of e-pharmacy. (Of course, the entity would also have to ensure compliance with few other important aspects such as e-commerce related regulations under consumer protection law and data protection related regulations under information technology law. Both merit separate evaluation and discussion.)
Despite being in a complex regulatory space, from a business perspective, e-pharmacies are a growing segment that needs capital and can justify it with steady if not rapid growth in the market.
1 W.P.(C) No. 11711 of 2018 & CM APPL. No. 45307 of 2018
2 CMP. Nos. 23341, 23345, 23346, 23350, 23369 and 23435 of 2018 in W.A. Nos. 2807, 2808, 2809, 2810, 2814 and 2818 of 2018
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