Insurance regulator's latest guidelines on sale of stake by an Indian insurance company to a foreign partner at the existing market price are “absolute and clear” but don't put “issues to rest that are different for different companies”, said Sanjiv Bajaj, managing director of Bajaj Finserv Ltd.
Bajaj was referring to a notice issued by the Insurance Regulatory and Development Authority of India on July 6 that asked all insurance companies to follow the Reserve Bank of India's guidelines under the Foreign Exchange Management Act for existing joint venture contracts. It said the ‘optionality clause' (for put and call options) is applicable to existing as well as new contracts. He was speaking on the sidelines of an insurance summit organised by the Confederation of Indian Industry on Monday.
IRDAI allowed Indian insurance companies to issue instruments under a ‘call' option only after they have run for at least five years. However, according to the optionality clause of RBI, no Indian company can exit at an assured price.
A put option in a joint venture contract allows the owner to sell its stakes to the partner at a specified price, by a predetermined date. In case of call option, the other party has the right to purchase the stake at a specified price for a certain period.
In the case of Bajaj Allianz, the German company had the ‘call' option to raise its stake from 26 percent to 74 percent at a price that gave Bajaj Allianz a ‘fixed' annual returns of 16 percent compounded since 2001, when the arrangement was signed. The IRDA guidelines nullify this arrangement as Allianz will have to pay current market rates to raise its stake.
Many JV agreements signed in early 2000 had these options when the opportunity arrived to raise the stake of the foreign partner from 26 percent to 49 percent. But they found themselves caught in a difficult situation as rules changed later.
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