IRDAI Directs Insurers To Comply With FEMA Rules On Options

by Vinaya HS on September 23, 2017

in Finance

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The insurance regulating body of the country, IRDAI has directed the insurance companies to ensure that they comply with FEMA or Foreign Exchange Management Act norms on options. The insurance companies who have a joint venture or JV with the foreign partners have been asked by the Insurance Regulatory and Development Authority of India to determine if the agreements that have ‘option clauses’ are already in compliance with FEMA rules. If they are not found complying, the regulator has instructed them to fill the gaps in the agreements at the earliest, as per latest stock market news.

IRDAI further details that the insurers must comply with the FEMA norms that are in relation to the attributes like pricing and also relating to put and call options in the Foreign exchange management rules.

Previously in the year 2013 in the month of November, The Reserve Bank of India (RBI) had made an amendment in the Foreign exchange management rules. As per that amendment, the reserve bank had allowed the ‘optionality clause’ and also ‘put and call options’ in the contracts. To add more, the RBI in consultation with government had also said at the same time, that any agreement that was entered into before the amended rules with ‘options’ will be treated as breaking the rules. Hence, it is a must for all the insurance providers who have a joint venture with foreign entities to follow the RBI guidelines as related to the FEMA.

The news has raised several queries and doubts for the insurance companies. The stock market has also reacted to this news and the reports confirm that many insurance companies got in touch with the IRDAI and asked the regulator if their Joint Venture agreements which were signed before the rules or their existing contracts with the clauses of optionality prior to the amendment notification were in compliance with the FEMA norms or not.

For example, in 2001 the JV agreement was completed between Bajaj Auto and Allianz. Allianz is the German insurer that has the call option to raise its stake in the life insurance joint venture from 26% to 74% at a pre-determined price. If the call option was used by the end of July’16, this pre-determined price would have been Rs 5.42 per share along with interest of 16% pa. But after the year 2016, Allianz will now have to pay the market price.

Hence, now it is the responsibility of the insurers to go through their Joint venture agreements with foreign entities and maintain the compliance with pricing rules for options. If they are found in any breach of the norm, the insurer should make instant amendment in the pact to confirm compliance with rules. However, the regulator has not made an announcement regarding the time frame within which this activity must be completed. Hence, in absence of any specified timeline of compliance, the insurance providers can take their time, but all said and done the sooner they comply, the better.

For more on Legal News in India, visit BloombergQuint.




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