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HDFC Standard Life-Max Life Likely To Disclose Alternate Merger Structure In 30-45 Days

India’s leading insurers HDFC Standard Life Insurance Co. Ltd. and Max Life Insurance Co. Ltd. may opt to merge directly instead of a complex three-step scheme of arrangement that would have led to eventual listing of the combined entity.

“The merger made sense yesterday, merger made sense today and merger makes sense tomorrow,” Amitabh Chaudhry, managing director and chief executive officer of HDFC Standard Life Insurance Company Ltd., told BloombergQuint in an interview.

I don’t see why we can’t come to a conclusion on the alternate strategy in the next 30-45 days... what the contours are and how to execute. 
Amitabh Chaudhry, MD & CEO, HDFC Standard Life Insurance

The Delay

HDFC Standard Life Insurance and Max Life Insurance, a joint venture between Max Financial Services Ltd. and Mitsui Sumitomo Insurance Co. Ltd., announced the merger in August last year. Both the insurers expected to close the deal in 12-15 months.

The companies have, however, failed to convince the insurance regulator, Insurance Regulatory and Development Authority of India (IRDAI), on the structure of the merger. “Almost 10 months from that date, we still don’t have any regulatory approval in place, and we require a number of regulatory approvals,” said Chaudhry.

Under the proposed process, Max Life will first merge with its parent company Max Financial Services. Then, the life insurance business will be de-merged from Max Financial and then merged into HDFC Life.

Shareholders of Max Life would get one share of Max Financial for every 4.98 shares of Max Life. In the second step, shareholders of Max Financial (post the amalgamation with Max Life) will get 2.33 shares of HDFC Life for each share they hold, the joint statement had said.

The deal has been held up over the interpretation of Section 35 of the Insurance Laws Act, 2015, which allows only insurers to merge.

Section 35(1): Notwithstanding anything contained in any other law for the time being in force, no insurance business of an insurer shall be transferred to or amalgamated with the insurance business of any other insurer except in accordance with a scheme prepared under this section and approved by the Authority.  

There are enough case laws in the country that suggest that “you don’t have to look at the scheme of arrangement at every step”, Chaudhry said.

A scheme of arrangement is like a box: you have to look at what was there before, and what is there at the end of the scheme of arrangement, because the scheme of arrangement lasts for an hour or so. If you don’t look (at every step), then before the scheme there are two insurance companies and post the scheme the companies have merged.
Amitabh Chaudhry, MD & CEO, HDFC Standard Life Insurance

While HDFC Life and Max Life believe that the current structure meets the regulation, IRDAI has a legal opinion from Solicitor General Ranjit Kumar which said the scheme of arrangement is not permissible.

The regulator had also sought an opinion from Attorney General Mukul Rohatgi, the highest law officer of the country, but he has returned the case file to the insurance regulator without commenting on it, according to multiple media reports.

Obviously, we have to take a call whether we should keep waiting for the change in this position on that point or we go with an alternate structure. 
Amitabh Chaudhry, MD & CEO, HDFC Standard Life Insurance

An alternate structure would mean the merger would be pushed by another 12-15 months and that would be subject to satisfaction of all regulators, Chaudhry said. The structure would have to make strategic sense and company would have to look at the process to reach that point, he added.

Back To The Drawing Board On IPO

HDFC Group was looking to list HDFC Life through an initial public offer. However, this plan was put on hold after it agreed to merge with Max Life. The IPO process would take another 12-15 months, said Chaudhry.

The question that all of us are asking is: do we keep waiting for the 12-15 months? Even in this 12-15 months, there are execution issues and risks. Or we instead do the IPO, but the intent to do the merger does not go away. That’s again one of the structures which is on the table.
Amitabh Chaudhry, MD & CEO, HDFC Standard Life Insurance