HDFC Life and Max Life merger hits regulatory roadblock
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The Insurance Regulatory and Development Authority of India (IRDAI) has expressed reservations on the planned merger of the life insurance businesses of Analjit Singh-promoted Max Financial Services Ltd and mortgage lender HDFC, the firms separately disclosed to stock exchanges.

Both the companies said they plan to clarify the matter with the regulator. The merger, if it goes through, will create the largest private life insurer in the country.

In August, KKR-backed Max Financial, the listed holding firm for Max Life Insurance Co Ltd, said it would hive off the non-insurance business into Max India. After the amalgamation of insurance business with HDFC Life, it will become a listed company wherein HDFC Life will hold 69% in the entity while Max Life will hold the remaining, it said.

However, the insurance regulator has expressed reservations to accept the scheme of amalgamation in its current form for the application that sought the in-principle approval for the scheme on 21 September 2016.

Max Life and HDFC Life said the scheme of arrangement is in compliance with applicable laws and that that plan to further clarify the matter.

If approved, the combined entity will create a Rs 255 billion annual premium company, with scale, differentiated portfolio and wider reach to expand in a growing life insurance sector, HDFC Ltd, parent of HDFC Life, had said when it announced the amalgamation in August.

In a tiered structure, the merger will initially involve the amalgamation of Max Life with Max Financial Services. For this, the shareholders of Max Life will get one share each of Max Financial Services for approximately five shares of Max Life.

The life insurance unit will then be demerged into HDFC Life. Separately, Max Financial Services will be merged into another listed company of the Max group – Max India.

For the demerger, the shareholders of Max Financial Services post the amalgamation with Max Life will get 2.33 shares of HDFC Life for each share of Max Financial Services.

The proposed transaction requires regulatory approvals from various bodies including IRDAI, Competition Commission of India (CCI), Securities and Exchange Board of India (SEBI), stock exchanges and high courts, and is expected to complete with 15 months.

HDFC Life is a joint venture between the Indian mortgage lender and the UK-based Standard Life Plc. HDFC holds 61.65% and UK-based Standard Life 35% of the insurer while minority shareholders hold the remaining. Its total premiums for the year ended 31 March 2016 were at Rs 16,313 crore and total assets under management (AUM) were Rs 74,247 crore.

Max Financial is India’s first listed company focused on life insurance. It owns 68.01% of Max Life while Japan's Mitsui Sumitomo Insurance Co holds 25% and Axis Bank the remaining 5.99%. Max Life's total premiums for the year ended 31 March 2016 were at Rs 9,216 crore and AUM was at Rs 35,824 crore.

Currently, India's life insurance sector is largely dominated by state-run Life Insurance Corp while SBI Life, a joint venture of State Bank of India and BNP Paribas, and ICICI Prudential Life Insurance are the top two private-sector life insurers by premium income with HDFC Life ranked third.

ICICI Prudential Life made a debut on the stock markets in the last week of September, with its shares ending almost 11% lower from the issue price after India’s biggest initial public offering in six years. The debut gave the company a market value of Rs 42,722 crore ($6.4 billion).

The proposed merger comes just months after Max Group announced that it will split into three separate listed companies housing different businesses. Post the split, the group's erstwhile listed company Max India was renamed as Max Financial Services Ltd (MFS) focusing on solely on the group's flagship life insurance activity through its majority holding in Max Life. The second unit—the new Max India—houses the investments in the health verticals and the third entity Max Ventures and Industries Ltd (MVIL) houses the manufacturing subsidiary—Max Speciality Films. The second and third entities were recently listed as well.

The demerger of the Max Group into the three separate listed entities has translated into a value unlocking exercise for its investors including Goldman Sachs and International Finance Corporation (IFC).

Shares of Max Financial Services fell 2.12% to Rs 560 in the morning session on BSE on Monday while Sensex fell 2.54%.

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