Hospitals argue that pharmacy sales are integral to clinical care and are not a distinct trading activity, particularly when they sell to their own patients. Although no regulatory action for a foreign exchange violation has yet been taken, on this point, most investors are cautious. Hospitals with foreign investment now often restrict pharmacy sales to their own patients. Any exchange control risk is an investment red flag. The pharmacy model must, therefore, form part of due diligence and contractual undertakings obtained.

Doctors are a hospital’s core human capital, directly influencing its financial performance. Tax law distinguishes employment from professional and business income. Salaries are taxed differently from profits. Doctors are independent professionals, usually engaged as consultants, on a non-exclusive basis. Hospitals have limited control and supervision. Alteration of these terms risks the relationship being reclassified as employment, with tax and compliance implications. As consultants, doctors are ineligible for statutory employment benefits and share options. While a doctor’s own taxation position may seem personal, it is often an important consideration in deal structures, affecting payroll design, incentives and retention. Investors should offer incentives to doctors that balance tax efficiency with long-term commitment, such as performance-linked terms to ensure continuity of services.

Building and operating a hospital is capital- and time-intensive. Specialised infrastructure and equipment require licences and permits. Many large hospitals operate on leasehold premises where the landlord or licensor is responsible for obtaining essential approvals. Lapse or delay by property owners may disrupt operations, and the risk of broken leases materially affects business continuity and valuations. Where the promoter or founder owns the land or buildings, problems may arise when their stake is acquired or diluted. Uncertainty of tenure, title and control of real estate unsettles investors and may disrupt deals. Hospital owners seeking investment should operate hospitals on self-owned land or secure long-term, stable leases. Although this requires more initial capital, it provides a stable business platform and a more attractive investment risk profile.

Hospitals require multiple authority and regulatory permits, including a clinical establishment registration, environmental clearance and practice-specific licences for pre-natal tests, blood banks and diagnostic imaging etc. Most hospitals require pharmacy licences and general business registrations. This entails complex compliance for countrywide chains, with state-level variations. For investors, licensing is a checkpoint at entry and a monitoring priority. Due diligence must examine the status and transferability of licences, non-coverage, expiry and dependence on third parties. Investors usually incorporate compliance monitoring into governance frameworks, with periodic audits and escalation protocols.

Medical negligence claims are unavoidable. Patients allege deficiencies in their care and seek compensation under consumer protection laws. Many complaints are frivolous, but outstanding claims appear as contingent liabilities on balance sheets, affecting the viability of deals. The reputational fallout may be even worse. High-profile, media-fuelled cases may imperil attractive deals or cause renegotiation. Investors usually accept such risks but take out reliable insurance, ensure strong clinical governance, require incident reporting and implement patient grievance mechanisms.

Healthcare deals continue to face these hazards. They may not diminish the sector’s appeal, but a realistic approach can transform the headline appeal of assets into strong investable propositions.

This article was originally published in India Business Law Journal on 7 January 2026 Written by: Tanavi Mohanty, Partner. Click here for original article

Read Less-