The government's decision to increase foreign direct investment cap in the insurance sector to 49% could reopen the prickly issue of pricing the additional 23% stake sale to the foreign partner. One of the larger companies where the issue is likely to arise is Bajaj Allianz Life and General Insurance, where the Indian promoter has said that pricing would happen at market value despite an earlier agreement for a stake sale at a formula that offered a fixed return.
Most insurance joint ventures have given their foreign partner the right of first refusal to buy additional stake up to 49%. This includes large insurers like SBI Life and HDFC Life. HDFC chairman Deepak Parekh said in the recent AGM that Standard Life has the first right to buy stake for an additional 23% at market price if limits are raised.
Stake sales at market price or fair value are not an issue. However, several companies had entered into an agreement where the equity stake would be transferred at a price based on a pre-determined rate of return. Such agreements served two purposes: they ensured that the Indian partner was not exposed to risk and second, it allowed the foreign buyer to increase stake with a nominal amount even though the value of the business would have risen considerably.
With a call option in place, most of the funding for the expansion of business came from the foreign partner by buying equity shares at a huge premium. For instance, the shareholder funds of Bajaj Allianz Life Insurance continue to be Rs 151 crore while reserves and surplus amounted to Rs 4,811 crore. In the case of Bajaj Allianz General Insurance, the share capital was around Rs 110 crore while reserves and surplus amount to Rs 1,245 crore.
In 2001, when Bajaj Auto entered into two joint ventures with Allianz, the bike maker gave the German insurer an option to hike its stake up to 76% in the life company and 50% in the non-life venture. Bajaj Auto had also agreed to a deal where the German Insurer could hike stake in the life company and the non-life company up to 74% and 26%, respectively, for a fixed compounded return of 16% per annum if the increase in stake happened before 2016.
Earlier speaking to TOI, Sanjiv Bajaj, MD, Bajaj Finance, had said that the %government's decision to hike foreign direct investment in the insurance sector was a positive for Bajaj Finserv shareholders as the companies did not need any more capital and Bajaj Finserv would book profit on selling shares to Allianz at market prices.
Bajaj Auto had disclosed that it had received a 'premium' from Allianz with partnering Bajaj Auto. Subsequently, when the demerger of the finance business happened from Bajaj Auto, it came to light that there was also an agreement to transfer stake at a price based on a fixed return formula.
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