Call options rampant among insurers
The Bajaj group announcement that its foreign partner Allianz in the joint ventures for life and general insurance has call options to acquire up to 50 per cent of the paid-up capital of these two companies at a predetermined price is, according to industry experts, a prevalent practice among private insurers in the country.
Since foreign players were allowed in the insurance business in 2000-01, the government has capped foreign direct investment for the sector at 26 per cent, which the foreign partners in these firms find extremely limiting. They have been lobbying for at least a 49 per cent stake in these ventures but have been stymied by political opposition. Companies like New York Life, MetLife, Aviva and ING have sought a higher FDI cap.
The Insurance Development and Regulatory Authority has seconded this view citing the huge investment requirements of the insurance business.
Sources said many foreign insurers have entered into agreements similar to what the Bajajs have with Allianz, primarily to deny the local partners an upside when the struggling industry comes of age.
After the demerger of Bajaj Auto, the company said, “If and as permissible under applicable laws and subject to regulatory approvals required Allianz SE can exercise call options to increase its holding to 50 per cent from the present 26 per cent in the case of Bajaj Allianz Life Insurance Co Ltd, the life insurance joint venture, and Bajaj Allianz General Insurance Co Ltd, the non-life insurance joint venture.”
The call option is open ended and it can be exercised within 15 years from the date of entering the agreement or even after that. For the life insurance joint venture, in case the German insurance major decides to exercise the call option within 15 years, the price will be Rs 5.42 per share plus interest at 16 per cent per annum compounded annually.
In case it is exercised after 15 years, the call option will go at the highest of the three: Rs 5.42 per share plus interest at 16 per cent per annum compounded annually; or the market price in case the joint venture is listed; or the fair value of the company as determined by a mutually accepted accounting firm.
For the non-life insurance venture also, the price for the call option will be determined as in the case of the life insurance venture. The only difference is the basic price is taken as Rs 10 per share.
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