The Insurance Regulatory and Development Authority of India (Irdai) has asked insurance companies with foreign joint venture
(JV) partners to examine whether these agreements with ‘option clauses’ comply with Foreign Exchange Management Act
(Fema) norms. If there is any gap in the agreements, then the insurers should amend it to ensure compliance, the regulator said.
The insurers need to comply with the norms related to pricing, pertaining to put and call options in the Fema
Some insurance companies had approached the regulator with queries whether JV
agreements signed before rules were amended were in compliance with the norms or not. The Reserve Bank of India
(RBI), in an amendment to the Fema
rules on November 12, 2013, had permitted the ‘optionality clause’ (put and call options) in the contracts.
The central government and the RBI
in November 2013 had said any agreement entered into before the amended rules with ‘options’ were in breach of the norms. Hence, insurance companies with existing JV
agreements with foreign entities should fall in line with the RBI
guidelines issued under Fema.
has put the onus back on insurers to review JV
agreements for compliance with pricing rules for options. If found in contravention, the insurer
should amend the pact to ensure compliance with rules,” said an advisor to insurance companies.
has not specified any timeline within which insurers should comply with the norms and inform the regulator.
An optionality clause obliges Indian promoters to buy back securities from foreign investors at the price prevailing/value determined at the time of exercise of the put option by foreign investors, provided the put option is exercised without assuring any fixed return to the foreign investor. Moreover, ‘put’ options in favour of foreign investors will be valid under the exchange control laws.