3 Foreign Presence in Hospitals in India

In recent years, there is growing interest among foreign players to enter Indias healthcare sector through capital investments, technology tie-ups, and collaborative ventures across various segments, including diagnostics, medical equipment, hospitals, and education and training. For example: Singapore's Pacific Healthcare has made its first foray into the Indian market, opening an international medical centre, which is a joint venture with India's Vitae Healthcare, in the Indian city of Hyderabad. The Singapore based Parkway Group Healthcare PTE Ltd penetrated into the Indian health care market in 2003 through a joint venture with the Apollo group to build the Apollo Gleneagles hospital, a 325-bed multi-speciality hospital at a cost of US$ 29 million. Columbia Asia Group, a Seattle-based hospital services company, a worldwide developer and operator of community hospitals, has started its first American- style medical centre in Hebbal, Bangalore. Columbia Asia is the first hospital to enter the Indian healthcare market through the Foreign Direct Investment route. Wockhardt, the international arm of the Harvard Medical School, which also has a strategic association with Harvard Medical International, has set up a new hospital (a tertiary service provider) in Bangalore at a cost of around Rs. 200 crores. The Parkway group has also entered into a joint venture with a Mumbai-based Asian Heart institute and research centre to set up specialised centres of medical excellence in Mumbai. Max Healthcare and Singapore General Hospital (SGH) have entered into collaboration for medical practice, research, training and education in healthcare services. Steris, a US$ 1.1 billion healthcare equipment company, plans to set up a wholly owned arm in India to sell its devices and products in the countrys booming medical device market. Steris plans to make an initial investment of US$ 1,00,000 to set up the wholly owned subsidiary. Apollo Hospitals Enterprise Ltd has entered into a joint venture with Amcare Labs, an affiliate of Johns Hopkins International of the US, to set up a diagnostic laboratory in Hyderabad. An initial amount of US$ 2.2 million is to be invested and the laboratory is likely to be operational by mid-2006. Indias first geriatric hospital, the Heritage Hospital of Hyderabad has formed a joint venture with US-based United Church Homes to recruit, train and provide placement to registered Indian nurses in USA. The US-based healthcare products major, Proton Health Care has made an entry into India with its range of digital health monitoring devices and has a strategic tie-up with the Delhibased S M Logistics for distributing its products in the Indian market. The American Association of Physicians of Indian Origin (AAPI), a Non-Resident Indian group will be launching two pilot projects in Bihar and Andhra Pradesh in July 2006 to help improve Indias healthcare in rural areas. The AAPI has committed itself to the improvement 14

of primary healthcare under a memorandum of understanding during the Pravasi Bharatiya Divas, the annual conclave of the Indian diaspora, with the government. The following section discusses the nature and extent of foreign involvement in the hospitals segment in India. It focuses primarily on the role of foreign financing in Indian hospitals through FDI and other forms of financing (including FIIs, private equity funds, venture capitalists, and other modes) in the total financing structure of private sector hospitals in India and the regulatory environment affecting these inflows. The discussion is based on both secondary and primary sources of information.

3.1

Foreign direct investment in hospitals

Since January 2000, FDI is permitted up to 100 percent under the automatic route in hospitals in India. Thus no government approval is required as long as the Indian company files with the regional office of the RBI within 30 days of receipt of inward remittances and file the required documents along with form FC-GPR with that Office within 30 days of issue of shares to the nonresident investors.6 Controlling stake is also permitted in hospitals for foreign investors. FIPB approval is currently only required for foreign investors with prior technical collaboration, but is allowed up to 100 percent. Prior to January 2000, FDI in hospitals was permitted under the FIPB route, which meant that the FIPB would consider the investment proposals and take a decision and the Indian company with the RBI would make thereafter filings. Current regulations also permit other forms of capital mobilization, which are treated as FDI. For instance, Indian companies can raise foreign currency resources abroad through ADRs and GDRs under the automatic route, upto 49 percent subject to specified conditions and such investments are also treated as FDI. The lax investment environment for hospitals is also evident from the discussions. No major regulatory hurdles were cited by any of the respondents with regard to the setting up of hospitals. One respondent noted that there are some 20 odd licenses to procure, including environmental and various safety clearances, but the process is generally perceived to be quite streamlined. There is some concern about corruption and lack of transparency in some parts of the application process, and long processing time (around 6 months in some cases) and lack of response from authorities for particular licenses. But the hurdles are felt mostly at the operational level rather than in the regulatory framework per se. The following discussion highlights the available evidence on hospitals that have received FDI in recent years and views on the extent to which FDI is likely to come into the hospital business in India. It needs to be pointed out that a distinction is made between FDI in the traditional sense of ownership of physical assets on one hand and private equity and FII funding of hospitals through holdings of shares by individuals or a group of foreign investors on the other. If one goes by the current definition of FDI in India, private equity stake of over 10% by any individual investor also counts for FDI and Foreign Institutional Investors (FIIs) are permitted to invest under the FDI route in addition to the FII route. But for the purposes of this discussion, the aforementioned distinction has been made, as there are different implications in terms of return expectations, financial control, and time horizons.

See, RBI note on Foreign Investments in India (April 1, 2007).

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3.1.1 Status of FDI in hospitals

In order to understand the extent and nature of foreign direct investment in hospitals, a list of all FDI approved projects in hospitals and diagnostic centres during the January 2000 to July 20006 period was obtained from the Department for Industrial Policy and Promotion. This list consisted of 90 projects, for a total approved FDI amount of $53 million, and covering a wide range of countries, such as Australia, Canada, UK, US, the UAE, Malaysia, and Singapore, among others. However, if one examines the list of approved projects and separates hospitals from diagnostic centres, then one finds that the majority of these approved projects are diagnostic centres. Only 21 of the approved projects are in the hospitals segment. The following table shows the approved projects for FDI in hospitals as received from the DIPP, along with the source countries, and the Rupee and US dollar values of FDI approved.

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Table-3. Sl No.

Approved FDI Hospitals by DIPP (January 2000-June 2006) Date Indian Company Country of foreign investor Australia Canada Mauritius UK-NRI USA- NRI NRI Saudi Arabia Singapore Singapore UAE Foreign equity (Mns)

1 2 3 4 5 6 7 8 9 10

April 2002 December 2002 January 2004 January 2000 January 2000 September 2003 August 2000 January 1, 2003 July 2004 October 2001

Fernandez Maternity Hospital, Hyderabad Sir Edward Dunlop Hospitals, New Delhi Max Healthcare, New Delhi Dr. Ramayyas Pramila Hospitals Ltd, Hyderabad. HN Hospital, Mumbai Kalinga Hospital, Bhubaneshwar Thaqdees Hospitals Ltd, Thaikkatukkara, Kerala Duncan Gleneagles, Kolkata Pacific Hospitals, Hyderabad Malabar Institute of Medical Sciences Hospital Ltd., Calicut Peoples General Hospital Ltd., Bhopal Thaqdees Hospitals Ltd, Ernakulam Trichur Heart Hospital, Thrissur Bhimavaram Hospital Ltd., Bhimavaram S&V Loga Hospital Pvt. Ltd, Peramanur, Salem Vikram Hospital, Mysore Basappa Memorial Hospital Pvt. Ltd., Mysore Parekh Hospital Pvt Ltd, Mumbai Columbia Asia Hospital Pvt. Ltd., Bangalore Add Life Medical Institute Ltd. Sterling Hospital Building, Ahmedabad RA Multispeciality Hospital Pvt. Ltd, Coimbatore

Rs. 0.42 1,282.25 316.21 15.00 0.00 54.09 0.32 59.24 5.82 133.61

US $ 0.01 26.71 6.63 0.35 0.00 0.11 0.01 1.29 0.13 2.97

11 12 13 14 15 16 17 18 19 20

July 2002 August 2001 July 2001 August 2002 December 2002 November 2003 February 2004 April 2004 July 2004 August 2004

UAE UK UK USA USA USA USA USA USA USA

73.32 0.34 49.89 0.10 3.79 29.65 22.83 0.50 0.90 326.24

1.53 0.01 1.11 0.00 0.08 0.64 0.50 0.01 0.02 7.07

21

January 2004

British Virginia

0.06

0.00

Source: DIPP (2006)

17

The above list indicates that a few countries account for the bulk of FDI in hospitals in India. These are mainly the US, UAE, Singapore, and the UK, although some other countries such as Mauritius, Australia, and Canada also feature among the source countries for investment, some most likely for tax reasons. Non-resident Indians are an important source of investment (some projects are explicitly listed as NRI based while for several others, the particulars of the investor indicate clearly that there is NRI investment though this is not explicitly classified as such). Interestingly, by and large, this list of approved FDI projects in hospitals does not include the wellknown corporate hospitals in the country, excepting Columbia Asia, Max Healthcare, and Pacific Hospitals. In the latter cases, the funding source is an investment group, such as Pacific Healthcare Holdings, S&G Investment, or the Gleneagles group. A large number of the approved projects are small individual investor type hospitals, with NRI participation and in smaller cities, indicating the importance of diaspora contacts and location specific professional and other linkages that can affect foreign investment in hospitals. The amount of investment in most cases is quite small, with several having less than US $1million in FDI and the bulk falling in the $1 to $2 million range, indicating that several of these hospitals are small or mid size and not the major corporate hospital type. There is some discrepancy between what the above list shows and what is indicated by industry experts regarding the presence of FDI in Indian hospitals. According to several senior management persons who were interviewed for this study, there are really only three or hospitals which would qualify as FDI hospitals in India. These are Columbia Asia, Apollo Gleneagles, and Max Healthcare. The rest, according to them, are FDI approved on paper, and may not have brought in capital through the FDI route but rather through other sources of foreign financing available under existing regulations, following approval of their projects. While one possible reason for the discrepancy between what is given in the DIPP list and what is perceived by players may be a result of the low visibility of several of the smaller hospitals given in the approved list, there appear to be other reasons as well. Several experts who were interviewed noted that although many investors seek and obtain approvals, they do not necessarily enter the country to set up operations subsequently as their primary motive may not be setting up the hospital. In some cases, they stated that the sanction for the project might be used as a means to mobilize funds for reasons other than setting up the hospital. This was in part corroborated by the fact that when the survey agency did an initial check on the hospitals given in the DIPP approval list for drawing up their sample frame, it was found that several of them did not exist on the ground even though they had received approval several years ago. It was also pointed out that even the well-known joint ventures are more collaborative and equipment-centric in nature than investments in a financial sense. In the course of the survey, it also became apparent that there are some corporate hospitals which do receive FDI but which do not consider themselves as FDI hospitals. This is because the foreign funds that they receive are only for routing purposes. For example, in the case of one hospital, the respondent noted that the promoter company is based out of Mauritius for tax benefits and thus is technically classified as FDI. The private investor has also routed investment through Mauritius and this would also count as FDI. But the management at the hospital did not see themselves as an FDI establishment. Hence, there is clearly a distinction between what is technically classified as FDI as per legislation and what practitioners in corporate hospitals see as FDI in terms of its intent and implications for the functioning of the hospitals. Overall, FDI presence in Indian hospitals seems to be limited at present, notwithstanding the very liberal investment policy on FDI in hospitals. According to one estimate, foreign investors have tapped only 10 percent of the Indian healthcare market and thus the scope for FDI remains large. (The possible reasons for limited FDI presence are discussed at length later in this paper). There appear to be some post-approval, transparency and follow up related issues, as there is lack of 18

clarity about whether what is approved really materializes on the ground and motives of investors. There is also clearly a perceived difference between FDI which brings with it technology and creation of assets and FDI which is for tax benefit purposes and driven more by short-term expectations.

3.1.2 Prospects for FDI in hospitals 7

The discussions revealed that there are several prospective players in the Indian hospital market. One of these is Gleneagles, which had earlier come in through a joint venture with Apollo and was now interested in entering on its own, given its local experience. Other examples of prospective FDI players cited are the EMAAR group from Dubai, which has plans to set up some 100 hospitals all over the country, and Pacific Holdings from Singapore, which has started operations in a small way in Hyderabad. According to one industry expert, there are some 10 projects at present with overseas funding, including Medicity and Artemis. Many of the well-known domestic players are also mobilizing funds, including overseas funds through FIIs and equities to finance major expansion plans in other cities. There may also be increased foreign capital inflows into hospitals with some major corporate houses planning to enter the hospital business. 8 The IFC based in Washington, DC, has been approached for funding. Although there are perceived possibilities for joint ventures, with the foreign partner arranging for funds and the local partner helping to manage the business, generally it was felt that joint ventures are difficult to establish and maintain in the hospital business due to problems in aligning expectations of the partners. The main source countries for foreign investment are seen to be the US, UK, Australia, and Singapore. However, the prevailing view is that one would not see a huge amount of FDI in Indias hospital segment in the near future, despite the health sectors huge growth potential and the liberal regulatory environment. As one respondent noted, investments to the tune of US $100 million and above can only happen through investments in corporate hospitals (chains), but very few are likely to venture into India. One of the main reasons cited was the localized nature of this business and the need for in-depth knowledge of local market conditions and available resources, which would make it difficult to have control over the business and returns and would thus make foreign investors reluctant to take a long term position. It is also perceived that India would take some time before it can replicate the developed country model of very large corporate chain hospitals given the average size of hospitals in those countries is several times that of some of the largest hospitals in India (e.g., 10,000 versus 2,000) A leading article in the Business Standard on the growing corporate medical sector, illustrates the growing scope for foreign funding and other collaborative opportunities in Indias hospital segment. The examples of some major medical city projects in India are given in the box below. BOX- 1

Major Medical City Projects: Proposed and Newly Established

Medicity, Gurgaon

Dr. Naresh Trehans Medicity, a Rs. 1,200 crores project in Gurgaon, spread over 93 acres will consist of a 1,600 bed hospital. The project is modelled along the lines of the Mayo Clinic. It will

This section is largely based on discussions with management and practitioners in various hospitals and industry associations. 8 Some examples include Max, which is planning to set up in Gurgaon, Fortis in Gurgaon, Wockhardt in Jaipur and Delhi, and Narayana Hrudalaya in Jaipur and Kolkata.

19

have R&D facilities, complete biotechnology backup, and major undergraduate and postgraduate institutions for cardiology, oncology, neurosciences, bone and joint, and regenerative medicine and trauma care. Apollo Health City, Hyderabad

This project was opened in mid 2007, at an investment of Rs. 1,000 crores. With 33 acres, it is currently the largest health city in the country. The project is modelled on an integrated concept of healthcare. It will impart undergraduate medical education. It includes a postgraduate college for doctors, a nursing school, a college of physiotherapy, institute of hospital administration, institute of medical informatics, institute for emergency medicine, and an institute for paramedics. It contains a 500-bed hospital. Another 200 beds will be added over the next six months. Fortis Medicity, Gurgaon

This project is worth an investment of over Rs. 1,200 crores. It will have two campuses. The hospital campus will contain a high-end, multi and super-speciality hospital and research centre. The college campus will contain a medical college for undergraduate and postgraduate education, a dental college, nursing college and facility for primary and applied research in medicine. It will also have a 600-800-bed hospital. Fortis Medicity, Lucknow

This project is worth an investment of between Rs. 500 crores to Rs. 800 crores and is spread over 52 acres. It will include an 800-bed hospital, a medical college offering undergraduate, postgraduate, and postdoctoral courses, a dental college, nursing college, a college of physical medicine and rehabilitation, and a college of allied medical science. Health City, Bangalore

This 5,000-bed health city will be spread over 35 acres with a project cost of Rs. 2,000 crores. It will consist of 10 hospitals, which will come up over several phases. The 500 bed cardiac centre, Narayana Hrudayalaya is already functional and is spread over 12 acres. The second phase will have 1000 beds, 30 operating rooms, and a teaching institute to train cardiologists, cardiac surgeons, cardiac anaesthetists, nurses, various technicians, and healthcare specialists. The Health City will also have hospitals for specialities like orthopaedic, cancer, neurosurgery, ophthalmology, women and children. There will also be a thrust on telemedicine. Source: Business Standard, Weekend Section, July 28/29, 2007, p. I. and http://www.expresshealthcaremgmt.com/200609/bangalorediscovered01.shtml

By and large, industry experts feet that foreign players are more likely to come in through tie-ups and collaborations in areas such as research and training and technology ventures than through FDI as the former are less risky ventures and are easier to control. Foreign technical collaborations are permitted under the automatic route in hospitals. Some examples of existing collaborative ventures include tie-ups between major corporate hospitals and the international divisions of wellknown overseas hospitals, such as Cleveland, Mayo, Johns Hopkins, and Texas Heart. In addition, the general view is that existing domestic players who are planning to expand their operations and new players who are entering the hospital business are more likely to obtain funding through sources other than FDI. From the scale of the above investment projects and their integration of various aspects of healthcare, apart from healthcare delivery through hospitals, it is evident that there will be some degree of foreign funding and foreign involvement in some of these projects apart from investment by the domestic corporate sector. Foreign involvement is likely to be in the form of technical 20

collaborations and collaborative research and development and training activities. Foreign funding is also likely to come in various forms, many of which are discussed in the following section.

3.2

Other sources of foreign investment in hospitals 9

There are various other forms of foreign funding, which are being used by hospitals in India to either expand their operations or to set up new operations. The regulatory environment concerning foreign financing in hospitals is quite liberal. As mentioned earlier, FII as well as private equity funding over a certain stake are also permitted under FDI route. In addition, FIIs and private equity funds can individually purchase upto 10 percent and collectively upto 24 percent of the paidup share capital of the company, through open offers or private placement, or through the stock exchange. Proprietary funds, foreign individuals and foreign corporates can register as a subaccount and invest through the FII, subject to limits of 10 percent and 5 percent, respectively for these sub-accounts. Foreign venture capital investments (FVCIs) are also permitted, though subject to certain restrictions. Respondents made it clear that while these other forms of financing also classify as FDI, there is a distinction to be made between permanent and temporary FDI as these have different implications for the absorption of costs, benefits to patients, expectations of returns, and improved capacity in healthcare delivery. The discussions indicate that non-debt based foreign funding has come into Indian hospitals through investment banks, through private equity funds which have taken limited exposure positions of between 15-26 percent on various players, and through others such as FIIs, development agencies, and investment arms of foreign governments. Among these different sources, the most prevalent is private equity funding and now increasingly public offers. Several established corporate hospitals, including Max, Fortis, and Wockhardt are going for IPOs, where there is purchase of shares but without financial control and both foreign and domestic investors are subscribing to these shares. More and more hospitals are expected to raise money through IPOs in the near future, as this compares quite favourably with short term borrowing from banks, which involves a higher cost. However, the IPO option is open only to the reputed and well-established players and is not for new entrants. Despite repeated queries on the extent of foreign subscriptions in IPOs and in private equity funding, it was not possible to get an idea of the break-up between domestic and foreign investors under these modes. But it was noted by several respondents that the role of private equity funds, though significant, is less than that of individual investors through the IPO route. An estimated 20-25 percent of the financing is provided by private equity funds and venture capitalists in some of the corporates, according to one respondent and that independently listed healthcare companies prefer going directly to investors. The institutional investors that were commonly cited include Warburg Pincus, which has taken a 26 percent stake in Max India and later in Max Healthcare, and the International Finance Corporation (IFC) based in Washington. It was also pointed out that there is some amount of NRI investment in healthcare. Two classes of NRI investors were identified. First are NRI doctors who wish to return to India or contribute to India, are financially comfortable, and therefore wish to invest in a venture. They may team up with local doctors. The second group consists of individual NRI investors who have finances and contacts and see the health sector as a growth opportunity and feel they can get high returns. Both NRI doctors and non-doctors are funding hospitals mainly through purchase of shares, although as highlighted earlier, there is also NRI investment through the direct FDI route. Apollo is one hospital that has worked through a network of investors (domestic and foreign) who tend to be in

Based on discussions and secondary sources.

21

the medical fraternity. However, it was also noted that due to the difficulty in controlling processes, even NRI investments may not be that forthcoming, except in some larger hospitals. A few other forms of foreign financing emerged from the discussions, but their role was rather limited. One example was that of Hinduja hospital, which has a tie up with Dubai World, the investment arm of the UAE government. The latter has an equity stake of 49 percent in the hospital. Venture capital funding and FII funding also appear to be quite limited and discussions revealed that these are not expected to be significant sources of financing in the near future. In the case of VC funding, one new hospital cited that it had accessed funds from a group of venture capitalists that had sourced the funds from small investors, but that it had encountered difficulties in the absence of a guarantor or facilitator. Similarly, respondents noted that FII funding was not likely to flow in large amounts into hospitals, as either such funds would need to have deep knowledge of the healthcare sector and its economics, which was unlikely, and that FIIs would not venture into the hospital business if they were only looking at short term returns. In terms of debt based financing, external commercial borrowing (ECB) did not emerge as an important source of funding for hospitals, although several respondents noted that this would be the ideal source given it was cheaper than domestic borrowing and equity financing. One respondent cited the fact that although rules on ECB had been relaxed, permissions for the real estate and healthcare sector had not been given by the RBI, possibly due to capital market exposure related restrictions. Other respondents noted that ECBs were permitted and had been obtained by some players, but that their use remained limited mainly because of the foreign currency exposure risk as hedging costs could be quite high. One hospital had had to preclose its external loan as it had incurred huge costs due to currency fluctuations. But there was a consensus that such credit would still be cheaper than domestic borrowing at around 6 percent excluding the currency exposure risk, and at around 8 or 9 percent including this risk, compared to 12-14 percent rates for 8-10 year loans provided by PSUs and domestic private banks. Overall, external debt and more generally, debt based financing was seen as preferable to equity financing because of the additional issues of control, returns, and expectations in the case of private equity investors. Across all the sources of funding, however, it was apparent that large amounts of foreign funding are only flowing into major corporate hospitals Reputation and brand value are key to accessing funds through private equity, FIIs, or external commercial borrowing. Hence, new hospital projects would primarily have to rely on domestic debt and would not see much foreign capital inflows except through individual NRI investor or through groups of small investors. It is also felt that foreign investment is not likely to come to trust hospitals as investors are looking for returns and trust hospitals have delivery models and objectives that are not necessarily focused on the bottomline. Thus, any discussion of foreign investment in hospitals has mainly to do with the large private sector players who can access funds through various sources.

3.3

Pattern of financing in major corporate hospitals

The preceding discussion has highlighted the possibilities for FDI, foreign equity funding, and foreign debt based funding in hospitals. It is clear that there is scope for expansion in FDI as well as private equity funding, especially in larger hospitals. However, if one looks at the current pattern of financing, both domestic and foreign, for some of the major corporate hospitals in India, one finds that these constitute a relatively small share. It is domestic financing that predominates, in particular domestic long-term bank borrowings. The following figure shows the composition of overall financing (domestic and foreign) by 6 major corporate hospitals in India. 22

Figure- 1.

Structure of Borrowings

Source: Company balance sheets accessed from the CMIE Prowess database (2006 figures)

Over half of the finances are obtained through long-term bank loans. From the other categories of financing the share of foreign sources is not readily apparent, but roughly less than 20 percent could be funded through external sources. This corroborates the earlier discussion that although the sector has a lot of potential, to date, the role of foreign investment remains limited. The following table highlights the main pros and cons of the different sources of financing for hospitals in India, drawing upon the preceding discussion.

23

Table-4.

Summary of pros and cons of financing sources for hospitals

Source: Based on discussions and secondary sources

What might be the possible explanations for this untapped potential in terms of foreign financing, when growth opportunities in the sector are good, when there is a clear demand-supply mismatch which foreign investment can help address, and when there is a liberal investment environment? One possible explanation given by a respondent is that since over 80 percent of hospitals are not listed in the country, the scope for foreign investment in them automatically gets limited. But this does not address the issue of why there is limited foreign funding as a whole and why FDI, which according to industry experts would be the most desirable form of financing, is not forthcoming in larger numbers? What might explain the fact that the recent spurt in funds into hospitals has been more through the equity route and public placements compared to the FDI route, which would suggest that investors are hesitant to make a long-term commitment to the sector? One needs to examine the factors beyond the direct regulatory environment for foreign investment and see if there are sector-specific factors, which deter foreign direct investment in hospitals or if there are regulations in other areas that affect the hospital segment and its attractiveness to foreign investors. The following section looks at the constraints to foreign investment in hospitals, as noted by industry experts and based on a reading of secondary sources.

24