Bajaj FinServ has held out hopes of a windfall for shareholders if revised RBI strategy require German insurer Allianz to pay market price for increasing its stake in Bajaj Allianz Life Insurance. Bajaj FinServ has said it will honour all obtainable commitments and be fair to its partners but would struggle to get a better deal for its shareholders.
Later on Tuesday, RBI came out with revised pricing guidelines for transfer of shares to foreign investors. Under the norms, shares of unlisted companies can be transferred at a price not less than the fair value to be determined by a Sebi-registered category — merchant banker or chartered accountant as per the discounted free cash flow method.
He added. A report put out by JM Financial said the revised guidelines could have a positive impact of around Rs 480 per share on Bajaj FinServ. The company’s share price, which had last closed at Rs 339, attempt to a high of Rs 407.15 before falling back at Rs 399.15. “I have not seen the regulations yet in detail. These keep growing and we do not know when the 49% FDI in insurance policy will happen and what the regulations will be at that time,” said Bajaj FinServ MD Sanjiv Bajaj. “When it happens, we will approach the concerned regulators as appropriate,”
When asked whether he would strive to get a better deal for Bajaj FinServ shareholders in terms of the company’s stake in Bajaj Allianz Life, Mr Bajaj said: “My job is to always try and get a better deal for shareholders while honouring all existing commitments and being fair to our partners.”
It is not clear whether JM Financial’s interpretation is correct. The RBI circular seeks to amend existing guidelines that are not applicable to financial service companies. It’s not clear whether revised guidelines apply to finance companies. Moreover, the advantage for Bajaj FinServ will come into play only after the bill, raising foreign investment limit to 49%, is passed.
But this upside is much more significant than the growth potential in other businesses. Bajaj FinServ has ambitious plans for financial services, which includes wealth management and lending. It will also get into the mutual fund business through another tie-up with Allianz and will later this year decide on whether it will get into home loans. But these are all new initiatives unlike the insurance ventures which are mature profit-making businesses and command multi-billion dollar valuations.
According to JM, of the Rs 390 share price, Rs 259 comes from Bajaj Allianz Life and Rs 57 from Bajaj Allianz General Insurance. This valuation assumes that Bajaj has only a 26% economic interest in the life business and 50% in the general business. The report adds that the revised guidelines would put the value of the life business at Rs 737 per share for the Indian parent if Bajaj FinServ had a 74% economic value.
Nine years ago 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. The deal took place at a time when capital was in short supply and insurance companies did not enjoy fancy valuations. In return for the option, Bajaj hardly made any monetary investment into the insurance business with Allianz bringing in most of the Rs 1,000 crore invested in the life company.
Citing the agreement, the JM report said Allianz 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.
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