Problem of plenty for i-banks, legal firms handling insurance IPOs

This article has been modified to rectify an error in the earlier version

With a number of insurance companies readying for public share sales in the coming months, investment banks and law firms might face a problem of plenty.

The avalanche of offerings could lead to a clash in the timings for their appointments as insurers are likely to insert clauses that  prevent them from handling share sales of rival peers. This means the investment banks and legal teams might have to decide in advance which insurer’s share sale they want to be part of.

Ten insurance companies -- including seven general insurers, of which four are owned by the government -- are expected to hit the market with initial public offerings (IPOs) worth about Rs 30,000 crore in the coming months.

SBI Life and ICICI Lombard have filed offer documents with the Securities and Exchange Board of India. Government-owned General Insurance Corporation and New India Assurance are reportedly looking at filing their share-sale prospectus in the next two to three weeks.

Investment banks and legal entities deal with sensitive and confidential information while preparing a company for an IPO. Existing regulatory norms, say experts, do not prohibit them from handling IPOs of rival companies; however, a company has a right to prescribe conditions in its mandate letter, such as restricting them from accepting an assignment from a direct competitor, particularly when the timings clash.

Illustration: Binay Sinha
About four years earlier, the government's department of disinvestment had barred merchant banking entities which had been appointed for state firms from handling issues of private companies in the same sector.

“Issuers will not want the same banker to handle another insurance offering. There’s a clear conflict of interest, especially if there’s not enough gap between two IPOs. Investment bankers, for their part, will have to decide which mandates to take," said Prithvi Haldea, founder, Prime Database, a primary market tracker.

Issuances over Rs 1,000 crore are typically handled by three to seven bankers and one to three legal firms. This means insurers that are first movers on the selection front could have a greater number of legal and merchant banking entities to choose from.

“In everyday business, rival companies from the same sector seldom hire the same set of contractors, suppliers or consultants. There’s no reason why this logic should not apply to appointment of bankers and legal advisors during an IPO,” said an official of a large insurance company, on condition of anonymity.

E-mails sent to ICICI Lombard, SBI Life, HDFC Life, GIC and Reliance Capital did not get a response.

“Practically speaking, a merchant banker or a legal advisor to an IPO might agree to a covenant which restricts it to act as such in an IPO of a competitor company. Such an understanding could be either contractual or informal. However, such covenants or contracts might not be legally enforceable,” said Yogesh Chande, partner, Shardul Amarchand Mangaldas.

Under section 27 of the Indian Contract Act, agreements in restraint of trade are void. It stipulates that an agreement restraining anyone from carrying on a lawful profession, trade or business is void to that extent. “They may agree to such an understanding to gain league table points, which will help them win similar mandates,” Chande added.

Bankers can and do handle IPOs of the same sector if there is a reasonable time gap and the companies are not cut-throat rivals. In such cases, picking bankers which have previously handled issues from the same sector can be advantageous, due to their sectoral domain knowledge. The same bankers can also be re-appointed if one plays a fringe role in an earlier or later issue.

“Since the insurance industry is a new entrant to the capital markets (public share sales), prior experience of merchant bankers and other agencies in handling such issues could be an advantage rather than a source of conflict,” said K Sanath Kumar, chairman and managing director, National Insurance Company.

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