Aon BV of the Netherlands, one of the largest insurance brokers in the world, is exiting India citing “regulatory changes”.
The Dutch firm which holds 26 per cent stake in Aon Global Insurance Brokers Pvt Ltd has informed the authorities about its plan to exit from the venture through a formal communication. This is contrary to expectations of billions of dollars coming into the insurance sector through stake increases following the enactment of Insurance Amendment Act. Insurance joint ventures now seem to have run into problems relating to valuations and regulatory changes.
Aon tied up with Global — which was a leading name in the business for over three decades — to form a joint venture in 2003 soon after the insurance sector was thrown open to the private sector. The two partners were in a trading partnership even before the formation of the joint venture.
While Aon has cited “regulatory changes” for the exit plan, it’s unclear what “change” precipitated the matter to the breaking point. When contacted, Prabodh Thakker, chairman, Aon Global Insurance, declined to comment on the matter. The Thakker group controls 74 per cent stake in the venture.
Although the government raised the cap on FDI in insurance sector in March this year, it’s yet to receive any formal proposal from global insurance giants to increase the stake in the Indian joint venture in the last six months. On the other hand, some Indian and foreign partners of life and non-life ventures have been involved in a tug-of-war over “fair and reasonable” pricing and valuation for hiking the stake. While many Indian and foreign partners had earlier signed agreements for a pre-determined price — which is mostly at a very low price — when the foreign promoter increase or exit the venture, the subsequent Reserve Bank norms make it clear that it should be at a fair price.
“Where the shares of an Indian company are not listed on a recognised stock exchange in India, the transfer of shares shall be at a price not less than the fair value worked out as per any internationally accepted pricing methodology for valuation of shares on arm’s length basis which should be duly certified by a Chartered Accountant or a Sebi registered merchant banker,” says the RBI circular on transfer of shares involving foreign direct investment (FDI). On the exit price, the RBI says “the guiding principle will be that the non-resident investor is not guaranteed any assured exit price at the time of making such investment/ agreement and shall exit at a fair price computed as above at the time of exit subject to lock-in period requirement”.
Further, the Insurance Act clearly says that being a major shareholder, the management control should be with the Indian partner. This has prompted foreign firms to take a cautious stand as the management control and day-to-day affairs of some joint venture insurance firms operating in India are now with the foreign partners.
Rahul Bajaj had last week told The Indian Express that “we need to follow Indian regulations on valuation and management control. Insurance Act states that management control has to be with the Indian partner. This means Indian partner will have majority on the board.” IRDA chairman T S Vijayan had recently said at least six insurance companies have expressed interest in raising the stake of their foreign partners from present 26 per cent to 49 per cent.