"Yes, there will be filters...," Planning Commission Member Arun Maira said after Prime Minister Manmohan Singh held a meeting with his Cabinet colleagues on the issue. He said the decision would come into effect immediately.
However, no cap will be introduced on FDI which will remain at 100 percent.
"It was a good meeting. Whatever the high level committee had recommended...has been accepted," he said, adding for six months, FDI proposals for mergers and acquisitions would be routed through the Foreign Investment Promotion Board (FIPB).
In the meantime, the monopoly watchdog, Competition Commission of India (CCI) will be strengthened so that it develops the capacity to vet such deals.
Maira said the committee headed by him had also suggested having CCI filters. "Everybody agreed CCI is the right forum but that needs to be strengthened. Meanwhile FIBP will look into...," he said.
Monday's meeting was attended by Finance Minister Pranab Mukherjee, Health Minister Ghulam Nabi Azad, Commerce and Industry Minister Anand Sharma and Chemicals and Fertiliser Minister M K Alagiri. Planning Commission Deputy Chairman Montek Singh Ahluwalia was also present.
Home-grown firms acquired recently by multi-national firms included Ranbaxy Laboratories by Daiichi Sankyo of Japan, Shanta Biotech by Sanofi Aventis of France and Piramal Health Care by Abbott Laboratories of US.
"While striking a balance between larger public health concerns and strengthening domestic manufacturing", it was decided that India will continue to allow FDI without any limits (100 percent) under the automatic route for greenfield (new) investments in the pharma sector, Commerce and Industry Ministry said in a statement.
However, in case of brown-field (existing) investments, FDI will be allowed through the FIPB approval route for a period of up to six months, it said.
Reacting to the matter, Indian Pharmaceutical Alliance Secretary General D G Shah said, "We are happy to note that the government has acted in the long-term interest of the country. This distinction between greenfield and brown-field FDI will go a long way in ensuring medicine security of the people."
The affordability factor has so far been the hallmark of the Indian generic drugs all over the world, thanks to robust growth of the homegrown players, several of which have been now targeted by multinational firms mergers and acquisitions.
Earlier, there were some differences on putting filter within the different government departments.
While the Industry Ministry has suggested that the applications for M&As involving foreign investment should be routed through the Foreign Investment Promotion Board (FIPB), Maira felt that the competition watchdog CCI is the ideal filter.
The Finance Ministry on the other hand, is not in favour of any change in the current policy arguing that the roll-back will send a wrong signal to global investors.