Bajaj Allianz, other MNCs may be hit by RBI's rule of fair valuation

MUMBAI: Will Bajaj benefit from the Reserve Bank of India’s rule of fair valuation? The Germen insurer had entered into an agreement with Bajaj to raise its stake in the life insurance joint venture at a pre-determined price which is valid till 2016, reports Shilpy Sinha. Life insurance has gone through a volatile period as companies have taken time to readjust to the new norms. An RBI circular issued in 2010, said that all FDI deals have to happen on fair value.

“They would be keen to raise their stake,” said Sanjeev Bajaj managing director Bajaj Finserv in an interaction with ET Now. “But if there are any changes we will have to speak to them.”

As per the 2001 agreement between Bajaj Auto and Allianz, the German insurer has the call option to increase its stake in the life insurance joint venture from 26% to 74% at a pre-determined price if allowed under applicable laws and subject to regulatory approvals.

If the option is exercised by July 30, 2016, the pre-determined price would be Rs 5.42 per share, plus interest at 16% per annum, compounded annually from July 31, 2001, to the date of payment. After 2016, Allianz would have to pay the market price. As per the agreement, the transfer has to happen at a fixed rate which is subject to RBI regulations.

Besides Bajaj Allianz, there could be a few other insurance JVs where promoters have promised to allow foreign partners to increase stake to 49%. There needs to be more clarity on the valuation methodology. The Insurance Regulatory and Development Authority has not yet come out with regulations on how to value an insurance company.

The private sector insurance companies had stressed on the importance of raising the FDI limit from 26% to 49% for providing adequate capital in the form of equity for increasing the insurance penetration in the country.

The two deals in the life insurance space valued a company at 2-2.5 times the embedded value- present value of future profit plus adjusted net asset value.