Irdai red flags HDFC Life, Max Life merger

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The Insurance Regulatory and Development Authority of India (Irdai) rejected the country’s largest life insurance merger deal between HDFC Standard Life Insurance (HDFC Life) and Max Life Insurance on Wednesday.

“Further to the representations made to the Irdai, it has on June 7... reaffirmed its original position... HDFC Life and Max Life remain committed to the merger and are evaluating various options,” HDFC Life’s statement said on Thursday. Max Financial Services also issued a similar statement to stock exchanges.

Senior HDFC officials told Business Standard that while both companies would continue to work towards a merger, an initial public offer (IPO) was likely to take place earlier now.

“We will work on the IPO as well as the merger simultaneously. If there is an alternative structure, which can get Irdai’s approval in the next three months, we would look at it. Realistically speaking, the IPO is going to be a significantly easier process and is more likely to happen,” said the official.

There are several hurdles to creating any new structure, as it would have to satisfy all the stakeholders.

“Now we have to look at a structure where HDFC Life merges with Max Life. This implies that Max Life has to be separated from Max Financial Holdings and then the merger can take place,” the official said.

A new structure would also require clearance from shareholders of Max Financial, HDFC Life, foreign partners of both insurers, Irdai, the Competition Commission of India, and the Securities and Exchange Board of India, among others. Sources said that investment bankers and law firms were working on a different structure for the past couple of weeks. But a revised structure would take, at least, a few more weeks.

The process envisaged Max Life’s merger with its parent company, Max Financial Services, followed by the demerger of the life insurance business from Max Financial and merger into HDFC Life. The transaction would have led to automatic listing of HDFC Life through a reverse merger process. HDFC Life would hold a majority stake of 42.5 per cent in the combined entity, Standard Life would own 24.1 per cent and the Max promoters would hold 6.5 per cent. Along with this, the Max promoters would also receive Rs 850 crore as non-compete fee.

The merger deal, which was announced in August 2016, ran into rough weather after the insurance regulator rejected it in November because it interpreted it as a violation of Section 35 of the Insurance Act, 1938, which says that no life insurance business of an insurer can be transferred to any person, or transferred to or amalgamated with the life insurance business of any other insurer, except in accordance with a scheme prepared under the section and approved by Irdai.  

After the initial rejection, both companies made further representations to Irdai and the regulator agreed to send it to the law ministry for its interpretation. The law ministry, in turn, sent it to the attorney general (AG). Last month, the AG returned it without any comment. Amitabh Chaudhry, chief executive officer and MD of HDFC Life had told Business Standard last week that any alternative plan would take at least 15-20 months whereas an IPO would take only four-five months.  

An IPO, therefore, is a more likely option for the group. The insurer’s parent company, HDFC, had announced plans for an IPO last April after a lot of initial work. However, when the proposal of the merger came, both parties decided to go for it because it would have made the merged entity the biggest private sector life insurance company in the country with an asset base of Rs 1.1 lakh crore and over 50 per cent increase in the number of branches to 601.

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