HDFC Life Requested For Non-Compete With Analjit Singh, Says Max Financial Services
HDFC Life requested for non-compete to Analjit Singh for his goodwill.
Max Financial Services Ltd. is seeking approval from minority shareholders through a postal ballot to allow payment of Rs 850 crore to Analjit Singh and promoter group entities for the sale of their goodwill.
According to the terms of the merger, HDFC Life had to pay a non-compete fee of Rs 850 crore to Max Financial Services’ promoter group, including an upfront payment of Rs 501 crore, while the remaining Rs 349 crore would be paid in three equal installments.
A non-compete is usually paid to compensate a person for exiting a business and for promising not to re-enter it for a period – four years in this case.
The agreement also said that these payments are subject to the receipt of upfront majority approval from minority shareholders of Max Financial Services. According to the merger scheme, Analjit Singh and promoter entities will be classified as minority shareholders in the merged HDFC Life.
MFS, in a stock exchange filing on August 24, 2016, said its promoters agreed to enter into the non-compete and non-solicit arrangement to protect the interest of HDFC Life and its shareholders, upon the request of the latter.
For HDFC Life to enter into the scheme, it had to necessarily obtain a non-compete and non-solicitation undertaking from the promoters. But such a non-compete and non-solicitation undertaking cannot be offered by the company since it will stand dissolved under terms of the merger scheme, the postal ballot said.
Max Financial says the Rs 850 crore payable by HDFC Life as non-compete fees is consideration for the sale of the goodwill of Analjit Singh, but Amit Tandon of investment advisory firm Institutional Investor Advisory Services (IiAS) says the ‘goodwill’ belongs to all investors including the small shareholders who may have bought the (Max) insurance policy.
Non-Compete Agreement
HDFC and HDFC Life did not respond to BloombergQuint’s queries on how the non-compete was arrived at for the transaction. But Tandon questions the payment of non-compete fee itself.
While the deal itself is good for both the companies, where is the question of paying non-compete to someone who continues to remain invested in the business?Amit Tandon, Managing Director, Institutional Investor Advisory Services
The deal will result in Analjit Singh and promoter group entities of the company holding 6.56 percent in the merged HDFC Life.
The company highlighted some of the salient features to its shareholders in the postal ballot:
- Analjit Singh and the promoter group are restricted from investing or engaging with competition.
- Analjit Singh and promoter group are restricted from poaching any employee or customers, agents or distributors engaged with HDFC Life.
- The restrictions are for a period of four years.
The non-compete and non-solicit agreement is restricted to only India and United Arab Emirates, since both countries are directly linked to the commercial activities of HDFC Life.
The non-compete will require a sign-off from the majority of the minority shareholders. Analjit Singh declined to answer the question on the tenability of the non-compete clause from BloombergQuint at the August 8 press interaction, since he is an interested party. Deepak Parekh, chairman of HDFC Group, said Analjit Singh and Max Financial Services will have to get shareholders’ nod ahead of market regulator SEBI’s approval.
SEBI will look at the general body resolution. In the Extraordinary General Meeting or EGM of the shareholders, the promoters are not allowed to vote. As the majority of minority will have to vote, (promoters of Max Life) Analjit and his family cannot vote. And if he gets the majority of minority approved, then SEBI should not have any problem.Deepak Parekh, Chairman, HDFC on August 8, 2016
BloombergQuint tried seeking information on the rationale for arriving at the non-compete fees and whether this was factored in while arriving at the swap ratio for the merger of HDFC Life and Max Financial. Emails send to HDFC and calls made to Amitabh Chaudhry, managing director and chief executive officer of HDFC Life by BloombergQuint went unanswered.