The board of directors at HDFC Life are slated to meet on July 17 to take a final call on the future course of a proposed merger with Max Life Insurance, after the sector's regulator Insurance Regulatory and Development Authority (IRDA) turned down the deal in its current form, last month. “The final call will be taken next week,” said the spokesperson at HDFC Life, refusing to divulge any detail.
The merger between the insurance behemoths was announced in June last year wherein Max Life was first supposed to merge with the publicly-held Max Financial Services Ltd which in turn was slated to merge with HDFC Life, offering it an automatic listing route. It was supposed to be a three-way merger.
However, IRDAI rejected the proposed deal on the basis of Section 35 of the Insurance Act, 1938, wherein one insurance firm is not allowed to merge with a non-insurance firm. In the transaction in its current form, Max Financials is not technically considered a life insurance firm.
Industry insiders said that if the deal does not go through, shareholders of HDFC Life may first want to contemplate its listing plans and in that case, the merger may be put on the backburner, resulting in a delay of at least a year.
However, if the insurers want to revive the deal, there are currently two options in front of them. One, they work out an alternate structure but that would also cause further delays. Two, they challenge the order given out by IRDAI.
“IRDA’s interpretation of Section 35 seems to be more on the technical side and less on the corporate restructuring jurisprudence. At this critical stage where improving ‘ease to do business’ should be a guiding principle, any technical interpretation could have been avoided. I hope the Sebi Appellate Tribunal (SAT) will step in for a course correction,” Manoj Kumar, legal expert and managing partner, Hammurabi and Solomon had earlier told Forbes India in an interaction.
In a grossly under-penetrated insurance market, mergers and acquisitions (M&As) are key. “Insurance is a cash-intensive sector where companies need to have very long-term approach and deep pockets. Going forward, in an industry like this, M&A will become imperative,” said Jagannadham Thunuguntla - Head of Fundamental Research at Karvy Stock Broking. There are currently 24 life insurance players in the industry dominated by the public sector behemoth Life Insurance Corporation. In the non-life space, there are as many as 31 players. Till date, the industry has not witnessed too many M&As. Late last year, HDFC Ergo General Insurance Company acquired L&T General Insurance.