Mumbai: The Insurance Regulatory and Development Authority of India (IRDA) has denied permission to the proposed merger of Max Life Insurance Co. Ltd and HDFC Standard Life Insurance Co. Ltd (HDFC Life), saying the structure of the deal violates Section 35 of the Insurance Act, 1938, which bars the merger of an insurance company with a non-insurance firm.
In separate statements on Thursday, both Max and HDFC Life said IRDA has reaffirmed its earlier position on the deal in its current structure, following which both companies are exploring other options.
“Further to the representations made to IRDA, the IRDA has on 7 June, 2017, reaffirmed its original position regarding Section 35 of the Insurance Act, 1938. HDFC Life and Max Life remain committed to the merger and are evaluating various options,” Max India Ltd informed the exchanges on Thursday.
“HDFC Life and Max Life remain committed to the merger and are evaluating various options,” HDFC Life said in a separate statement.
The development comes after attorney general Mukul Rohatgi, India’s top law officer, declined a request from the law ministry last month seeking legal opinion on the proposed merger of Max Life and HDFC Life, leaving the final decision resting with the IRDA.
According to two people directly aware of the discussions, both companies have begun reworking the structure of the deal.
“One option could be to directly merge Max Life with HDFC Life but these are mere options as of now, and no final decision has been taken,” the second person said, on the condition of anonymity.
HDFC Life and Max Life had announced their merger plans in August last year through a three-step merger process, under which Max Life would first merge with its parent company Max Financial Services, and subsequently the life insurance business would be de-merged from Max Financial and merged into HDFC Life. The transaction would have led to the automatic listing of HDFC Life through a reverse merger process. HDFC Life would hold a majority stake in the combined entity.
In November, however, IRDA referred the deal to the Union law ministry after raising concerns that the current structure of the deal was in violation of Section 35 of Insurance Act, which does not allow merger of an insurance firm with a non-insurance firm. The law ministry, in turn, sought an opinion from Rohatgi.
As per the original scheme of arrangement, the deadline for IRDA approval was to end in June, while that for court approval in February 2018. The people cited above said both companies will now seek a fresh deadline once a new structure is finalized.
The potential merger is expected to create India’s largest private sector life insurer, second only to state-run Life Insurance Corp. of India (LIC).
HDFC Life is, meanwhile, also looking into the possibility of listing alone, Amitabh Chaudhry, managing director and chief executive officer of HDFC Life, told ET Now in a recent interview.
“An IPO is a definite possibility and we cannot keep waiting forever to get the merger through. We are at least 6-8 months behind as nothing much has happened since November,” he told the television channel in May. However, HDFC Life may see a reduction in the premium for its shares if it chooses to go ahead with a listing before the completion of its proposed merger with Max Life, Mint reported on 30 May.
If HDFC Life is listed before the merger, it might be valued similar to ICICI Prudential Life Insurance Co. Ltd, its only listed peer, which trades at a market cap to embedded value of 3 to 3.5 times. HDFC Life, with an embedded value of around Rs12,300 crore, may end up getting a market capitalization of around Rs31,000-37,000 crore, lower than what it can command if it lists as a merged entity,