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RBI ISSUES NEW VALUATION NORMS FOR INSURERS TOO
June, 25th 2010

Insurance companies will be required to adhere to the Reserve Bank of Indias latest guidelines on pricing of shares of unlisted companies, increasing the amount investors would have to pay for buying into them.

The central bank has taken up the issue with the insurance regulator, IRDA, after the latter had said the new rules will not apply to insurance companies.

Irda is expected to clarify on the issue soon, said a government official privy to the development.

A number of Indian promoters are believed to have entered into agreements with their foreign partners to allow them to increase their stake to 49%, as and when regulations allow.

Foreign investment in insurance is capped at 26% but a bill proposing to increase the limit to 49% is with Parliament.

According to the new RBI norms, shares of unlisted companies can be transferred at a price not less than the fair value, which is to be determined by a Sebi-registered merchant banker or

chartered accountant as per the discounted free cash flow method.

Under the earlier rule prescribed by the controller of capital issues, or CCI, fair value of an unlisted company was taken as average of the net asset value method and the profit earnings capacity value method.

The new method is expected to yield a higher valuation as it would take into account the potential of the business as opposed to the accounting approach of the earlier methods.

The change was particularly relevant for valuation of insurance companies, which have long gestation with initial years of substantial losses.

However, in a clarification released last Thursday, Insurance Regulatory and Development Authority said RBIs guidelines dated May 4, 2010, are applicable to Indian companies in sectors other than the financial sector.

In view of the same, it is clarified that provisions of the said circular continue to be not applicable to the insurance sector, it had said.

But with the RBI insisting that rules will apply to insurance as well, foreign investors will now be required to shell out more to their Indian partners under the cash flow method as valuations will go up. The move, however, will beget domestic insurance investors a higher value than what they had envisaged.

The earlier method allowed investors to price their assets conservatively as it was based, particularly in the profit earnings capacity method, on the current performance.

The new guidelines are aimed at removing any discretion in price-fixing and also reduce the chances of lower valuation under the earlier guidelines.

The idea behind central banks move was ascertain that Indian business getting transferred outside of the country receives proper consideration.

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