The promoters of HDFC Life and Max Life, whose merger has been stuck with the insurance
regulator for more than nine months, are working on an alternate structure, said sources close to the development.
While a definitive deadline has not been set, discussions are on between the two companies. “There is a growing feeling within the companies that the Insurance
Regulatory and Development Authority of India (Irdai) may insist on another structure for this deal and in order to ensure that the deal goes through smoothly. Our law firms and investment bankers are working on alternate structures,” said a source close to the development, adding that an alternate structure should be in place in the next 30-45 days after which the companies plan to approach the regulator.
There are growing concerns about the closure of the deal because at the start of the merger process the expected deadline was 15-18 months. “With things not moving at all, we are definitely going to miss the deadline. The only way to go forward is by proactively looking at an alternate structure which will satisfy the regulator,” the source said.
The alternate structure is expected to address the issue of the merger between a holding company and a life insurance
company, which had been flagged by the Irdai. “If Max Life is separated from Max Financial and merged with HDFC Life, the regulator should not have a major problem,” said an insurance consultant.
According to insurance experts, if HDFC Life goes ahead with its initial public offering (IPO), then a simple structure of merger is possible under which Max Life will be separated from Max Financial and merged with HDFC Life, according to a fair-value swap ratio. “Once HDFC Life is listed, there would be an established valuation of the company which can then be used for the swap ratio. The regulator is unlikely to be too concerned with the non-compete fee of Rs 850 crore being paid to Max Life's promoters Analjit Singh and family unless the deal impacts policyholders adversely,” a consultant said.
The main roadblock to the merger comes from the interpretation of Section 35 of the Insurance Act, 1938, which says 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 the Irdai.
The proposed three-stage merger includes Max Life’s merger with Max Financial Services, which would, in turn, merge with HDFC Life. The deal structure was designed in this manner so that HDFC Life would automatically get listed on the stock exchanges since Max Financial Services is already listed.
The insurance regulator raised its concerns at the last stage, said industry sources, as Max Financial Services is the holding company of Max Life Insurance and the merger was taking place between a holding company and a life insurance company. Consequently, Irdai had sought the approval of the law ministry which, in turn, sent it to Attorney General (AG) Mukul Rohatgi. But, after the AG refused to give his opinion, the ball is back in Irdai’s court. “Since Irdai had already sent it to the ministry for its opinion, the understanding is that it feels it is beyond its purview to decide. So the question is whether it will change its position now,” an industry expert said.
Meanwhile, the Max Financial Services stock price has been fluctuating significantly in the past week. After falling by 13% on reports of HDFC Life’s plans to go for an IPO, it recovered 5% on Tuesday on the back of good results. Max Financial Services reported consolidated revenues of Rs 12,971 crore and consolidated net profit of Rs 395 crore in FY17, growing 19% and 56%, respectively, over the previous year.