Irdai expresses concerns over HDFC Life, Max Financial Services merger

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Mumbai: The proposal to create India’s largest private sector insurance company has run into hurdle as the Insurance Regulator and Development Authority of India (IRDAI) has opposed the merger of Max Financial Services Ltd and HDFC Standard Life Insurance Company Ltd. (HDFC Life), as per a disclosure made by Max on BSE on Saturday morning.

“An application was filed by MLIC (read Max) and HDFC Life seeking the in-principle approval of IRDAI for the above-mentioned scheme on 21 September 2016. IRDAI has expressed reservations to accept the scheme of amalgamation in its current form,” said Max on BSE.

The boards of HDFC Life and Max in August had signed a three way merger, which would create India’s largest private-sector insurer with total assets more than Rs1.1 trillion and lead to the eventual listing of HDFC Life on stock exchanges.

Post the merger Housing Development Finance Corp. Ltd (HDFC) and Standard Life (Mauritius Holdings) 2006 Ltd will be the promoters of the merged entity. HDFC will hold around 42.5% of the merged entity and Standard Life 24.1%. The promoters of Max Financial will hold 6.5%.

Also Read: HDFC Life-Max merger: Max Financial shareholders agree to non-compete fee

Irda’s problem lies in the fact that, HDFC Life is merging with Max Financial Services, which is a non-banking financial services firm, said a person with direct knowledge of the matter.

This contravenes provisions of the Insurance Act, which say that only two insurance firms can merge with each other.

However, the company refutes the same in the BSE disclosure Max said that the scheme of merger or amalgamation is in compliance with law.

“(company) believes that the scheme of arrangement as submitted to the IRDAI is in compliance with all applicable laws and proposes to represent and clarify the matter to IRDAI,” said the statement on BSE.

Also Read: HDFC Life-Max merger ratio likely at 10:24

So far the companies have been able to secure the nod of minority shareholders on the proposal to pay a Rs850 crore non-compete fee to Analjit Singh and other promoters of the Max group.

“ Irda has asked for clarification with regards to compliance with section 35 of the insurance act, which deals with amalgamation and transfer of life insurance business to any other company and the pertinent disclosures. Basically, Irdai wants to ensure that the merger is happening between two life insurance companies only , I.e HDFC Life and MAX Life. Since it is a three step merger process and Max Financial Services, which is an NBFC, is also involved in the scheme, Irda wants to ensure that at no stage any amalgamation is happening between Max Financial and any insurance company. So we have to clarify and disclose to Irdai that the non-insurance businesses , such as the telecom business, of MAX Financial Services will be first demerged into Max India and then only the life insurance business of Max Life will be effectively transferred completely to Max Financial Services and subsequently it will be merged with HDFC Life which will result in the automatic listing of the merged entity” said a person involved in the merger process on condition of anonymity.

“Irda had sought the views and recommendation of solicitor general of India a week back and the latest step by Irda has been taken accordingly it seems. The bankers and the lawyers involved in the deal will make a representation to Irda on Tuesday and subsequently the clarifications and the required disclosures will be made. The issue raised by Irda is just a basic technical disclosure requirement for more clarity on the deal to the regulator’s and the public. This will not come in the way of the merger. The deal will go for a high court approval in the second week of December and the entire process is likely to be completed by March 2017,” he added.

Mint reported on 28 September that this was a pre-requisite to the firm’s three-way merger around 65% of the votes polled were in favour of the resolution to pay the non-compete fee.

For the merger to go through the companies need to secure approval from Securities and Exchange Board of India (Sebi) and Competition Commission of India (CCI). On 7 September, Max Life filed the scheme of amalgamation with CCI, but an approval is yet to come.

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