Regulatory and operational hurdles, which may crop up in the process of the merger of 10 public sectors banks (PSBs) into four entities, are likely to present fresh challenges to the PSBs, as well as regulators and the government.
The insurance regulation doesn’t allow an entity to promote more than one insurance company. However, the proposed mergers have created a problem as many of these banks are promoters of different insurance companies.
For instance, Union Bank of India has a 25.10 per cent stake in Star Union Dai-Chi Life Insurance, while Andhra Bank has a 30 per cent stake in IndiaFirst Life Insurance. Similarly, Punjab National Bank (PNB) has a significant holding in PNB Metlife, and Oriental Bank of Commerce (OBC) has a 23 per cent stake in Canara HSBC OBC Life Insurance.
Canara Bank has a 51 per cent holding in Canara HSBC OBC Life Insurance, while Allahabad Bank has a significant stake in Universal Sompo General Insurance.
According to the merger plan, PNB, OBC, and United Bank of India will amalgamate into one, with PNB as the anchor bank. Union Bank will take into Andhra Bank and Corporation Bank.
Similarly, Syndicate Bank will merge into Canara Bank, and Indian Bank will absorb Allahabad Bank.
“You can either be an investor or a promoter in an insurance company. If you are holding more than 15 per cent stake in an insurance company, then you are a promoter; if the stake is less than 15 per cent, you are an investor,” said a former member of the Insurance Regulatory and Development Authority of India (Irdai).
“If two banks, which are getting merged, are currently promoters of two different insurance companies, then the merged bank can’t remain a promotor of the two firms. So, it will either have to reduce the stake below 15 per cent in both the firms and become an investor or bring down the stake in one firm to zero and continue as a promotor in the other,” the former Irdai member said.
“Cases where a merged entity has a holding in more than one insurance company, it will need to let go of one agreement and honour the other. The confusion is who will take that call because the banks have put in a huge amount of money to buy equity stakes in these insurance companies so that they can earn by selling policies,” said Ashvin Parekh, managing partner, Ashvin Parekh Advisory Services.
“There are multiple ways in which this cross-holding scenario for PSBs can pan out. For instance, either Union Bank reduces its stake in Star Union Dai-Chi because it has a lower stake than what Andhra Bank has got in IndiaFirst, or it continues to hold 10 per cent in each of the two companies as an investor after the merger,” said CEO of a private life insurer. “Dilution by any PSB
without a promise of any future business will mean that the bank that is selling its stake will not get value for the potential future business. So, it will be prudent that the merged entity holds a minority stake and continues to be a distributor.”
Rajkiran Rai G, MD of Union Bank of India, said the bank will “sort this issue out”. “The regulation says a bank cannot be a promoter of two insurance companies so we will comply with the regulatory guidelines.”
The experts appeared hopeful of regulator considering certain exemptions in this case and give time to banks to pare excessive stake. “Both the Reserve Bank of India and Irdai have to get involved in sorting this issue out. For the merger to go through, the government will have to bend a few laws,” Parekh said.
However, the former Irdai member said: “Irdai will not allow any change in the regulation, and one bank cannot be a promoter of two insurance companies.”
On the other hand, insurance companies believe that the decision to pare stake or remain invested as an investor rests with the boards of the public sector banks, and since there is time until end March 2020, the issue should be resolved.
“The merger process will take 6-9 months, and there can be a possibility that the banks pare their stakes before the amalgamation,” said R K Nair, a former member of Irdai.