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Prescriptions For E-Pharmacy

Legal uncertainty is detrimental to market and consumer interests because it encourages new entrants to grow in a manner that they become ‘too big to regulate’.

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The last few months have seen marked change in the e-pharmacy landscape in India. Big firms such as Amazon and Reliance have entered the market, either through their own platforms or through the acquisition of leading start-ups, such as Netmeds. The new Covid normal is likely to augment growth prospects for e-pharmacy, which was already projected to grow at a CAGR of 63% over the next two years. Despite this flurry of activity, legal uncertainty on the business model used by e-pharmacies, continues to plague the sector.

Technically, e-pharmacies are regulated under, the Drugs and Cosmetics Act (DCA), 1940 -- pre-independence legislation. This law does not contain any explicit provision which grants recognition to the online sale of medicine. As a remedial measure, the Government has been working on rules to allow e-pharmacies since 2017, but these are yet to be notified. Medical professionals and associations of druggists and chemists have asked the Courts to determine the legality of this business model. In late 2019, the High Courts of Delhi and Madras banned the online sale of medicines. The Courts urged the Government to notify relevant rules at the earliest. However, the Government has not notified new rules, even inviting the initiation of contempt proceedings from the Court. Instead, the Government issued a notification to grant legitimacy to the doorstep delivery of medicines by online platforms in March 2020, as a result of the covid-19 pandemic. This notification is a watered-down version of the proposed rules. It only deals with the need for e-pharmacies to obtain a license under the DCA and also restricts deliveries of medicines to households located within the licensee’s revenue district. The notification has consequently limited geographical reach and growth prospects of e-pharmacies.

Legal uncertainty is detrimental to market and consumer interests because it encourages new entrants to grow in a manner that they become ‘too big to regulate’. For example, Uber was able to create a large customer base which was dependent on its service through the use of free rides and discounts. As a result, the Government is constrained to take regulatory action which can potentially disrupt the service. Legal grey areas hamper the ability of smaller firms to compete effectively. Similar concerns could arise in the e-pharmacy industry unless the Government steps in to provide necessary recognition.

A patchwork of rules and notices issued under an outdated Act underlines an ad hoc approach to governance which is ill-suited for innovation. The Madras High Court said “unless the legislation keeps pace with the technology, the commerce based on technology has to lag behind”. Its observation highlights a central problem with the extant approach i.e. the legitimacy of technology-based entities is uncertain until relevant laws are passed. However, the enactment of a legislation can be a slow process which results in significant policy lags. Such gaps disincentivize entrepreneurs from taking risks and investors from making large investments. Smaller enterprises feel a disproportionate impact of such uncertainty because they have a lower appetite to take risks.

Second, legal unpredictability necessitates judicial intervention. In such cases, Judges are required to adjudicate matters in which they lack the required domain expertise, resulting in a detrimental impact on sectors. For instance, the Supreme Court’s cancellation of coal blocks and the 2G spectrum licenses was considered a transgression into the domain of the Executive. The coal block judgment had a marked impact on the fortunes of companies like Jindal Steel and Jaiprakash Power Ventures. Similarly, after the Madras and Delhi High Court judgments, e-pharmacies had to suspend their operations for a significant period of time.

Third, the use of a license-based command and control structure, lacks the necessary agility and adaptability required to respond to technology’s dynamic nature. In contrast, the United States, the world’s largest e-pharmacy market, relies on self-regulation. The National Association of Boards of Pharmacy, a non-governmental self-regulatory body, verifies online pharmacies, lays down rules regarding prescriptions and helps to address customers’ grievances. If India adopts dynamic systems of self-regulation or co-regulation, it can overcome legacy legal-regulatory hurdles. E-pharmacy companies have already come together as the Indian Internet Pharmacy Association, which has framed a Code of Conduct to govern the activities of online pharmacies.

A shift to new forms of regulation can be coupled with a change in the legal approach to recognize technology-based platforms. Currently, sectoral statutes, such as the DCA in the case of e-pharmacies, determine legal validity as well as quality-related requirements of a business. Going forward, a holistic information technology legislation should provide explicit recognition to new forms of e-commerce while a sectoral regulator or authority can oversee specific market functions. De-coupling legality from sectoral hygiene can provide necessary certainty to entrepreneurs to invest and take risks. It also reduces the need for judicial intervention that can stymie new markets.

Disclaimer: The views expressed in the article above are those of the authors' and do not necessarily represent or reflect the views of this publishing house. Unless otherwise noted, the author is writing in his/her personal capacity. They are not intended and should not be thought to represent official ideas, attitudes, or policies of any agency or institution.

Vivan Sharan

Vivan Sharan is a Partner at Koan Advisory Group, a boutique consulting and policy advocacy firm. An economist by training he is also a Visiting Fellow at the Observer Research Foundation

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Mohit Chawdhry

Research Assistant

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