Differences have cropped up between insurance joint venture partners Bajaj Finserv and Germany’s Allianz Group. The bone of contention is the price that Allianz will have to pay to raise its stake in its two JVs in line with government’s decision to allow 49% foreign shareholding in Indian insurance companies. Bajaj and Allianz entered into an agreement in April 2001 under which the German insurer had the option to raise its stake in Bajaj Allianz General Insurance and Bajaj Allianz Life Insurance after 15 years. The structure, created before pricing norms under foreign direct investments were formalised, allowed Allianz to increase stake at considerably cheaper valuations. Now, with norms requiring deals to be done at a fair value for unlisted entities, Bajaj is insisting that Allianz should pay fair value to be determined by a CA or merchant banker. Allianz, meanwhile, is demanding that it should be allowed to buy shares at the pre-agreed price, which is way lower than the fair value. “There are sharp differences over valuations. If Allianz raises its stake as per the 2001 agreement, Bajaj stands to lose a lot of money,” said a person familiar with the matter. Allianz did not respond to email queries on the issue. A spokesperson did not respond to text messages either. In response to an email query, a Bajaj Finserv spokesperson said, “Bajaj and Allianz are currently in discussions about the potential increase of the Allianz stake and the implementation of the various new regulations e.g. regarding Indian control. As the discussions are ongoing, we cannot comment on any details.” Industry circles said the difference in valuations between the stake valued at a fair value and the pre-determined price could be as much as $500 million. But this could not be independently verified. According to the shareholder contract between Bajaj and Allianz, the German insurer can exercise the call option in Bajaj Allianz General Insurance at Rs 10.00 per share plus interest at 16% per annum compounded annually from April 23, 2001 before April 22, 2016. A call option allows the buyer to purchase assets at an agreed price on or before a particular date. For life insurance business, Allianz’s call option would cost Rs 5.42 per share plus interest at 16% per annum compounded annually from July 31, 2001before July 30, 2016. The critical part for Allianz is that both the options have to be exercised before April 22 and July 30 this year for each of the businesses if the contract of 2001has to remain valid. Lawyers said the matter is tricky though Bajaj has a slight upper hand in the matter. “The Indian party will not be obliged to sell its stake to a foreign party at price lesser than the fair value determined by a Sebi registered merchant banker or a CA ( chartered accountant) as per any internationally accepted pricing methodology,” said Tejesh Chitlangi, partner at law firm IC Legal. “Such pricing requirement under FDI norms will prevail over the contractual terms wherein call option could have been exercised by the foreign party at a pre-agreed price which eventually turns out to be less than the fair market value.”
Source: Economic TimesDifferences emerge between insurance JV partners Bajaj Finserv and Germany’s Allianz Group
Industry: Insurance 2016-03-16
