Promoters of insurance companies, who have cut deals with their foreign partners to sell equity at fixed price, will now be able to stick to the contract. The insurance regulator has clarified that RBIs pricing guidelines for equity shares will not apply to insurance companies.

The company most affected by this notification would be Bajaj Finserv the holding company for Bajaj Allianz Life and General insurance. In May, the stock price of Bajaj Finserv shot up after a research report by a broking firm said RBIs guidelines would mean that Allianz would have to pay market price for increasing its stake in the life insurance venture.

Earlier, analysts had assigned only a 26% value to the companys holding in Bajaj Allianz because way back in 2001, Bajaj Auto had committed to allow Allianz increase its stake in the life venture up to 74% in exchange for an upfront premium.

In a clarification released on Thursday, IRDA 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.

According to insurance sources, besides Bajaj Allianz, there could be a few other insurance joint ventures where promoters have promised to allow foreign partners to increase stake to 49% as and when regulations allow.

But most of the companies where the management is predominantly controlled by foreign shareholdes do not enjoy the kind of market valuations enjoyed by Bajaj Allianz.

Last month, 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.

Soon after the guidelines, JM Financial came out with a report stating that the revised guidelines could have a positive impact of around Rs 480 per share on Bajaj FinServ.

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.

As per the 2001 agreement between Bajaj Auto and Allianz, the German insurer 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.