The bite in the insurance sector is of the recent rejection by the regulator—Insurance Regulatory and Development Authority of India (IRDAI)—of the proposed merger of HDFC Life and Max Life. This rejection has, at least for the time being, hit the brakes on the creation of one of the largest private insurance businesses in the country. The estimated asset size of this merger would have been approximately Rs 1.1 lakh crore if not more. As per reports, the parties had set 2018 as the deadline for completion of merger. No doubt, the regulator’s rejection has thrown a spanner into the works.
It seems that the parties have already started working on a revised deal structure. This may, however, get fructified at a later point in time than what the parties had initially planned for. Also, HDFC Life has already started planning for its IPO. Against this backdrop, it becomes important to analyse the reasons for IRDAI’s rejection of the merger proposal. The regulator didn’t come across any red-flags from a commercial or financial aspect. Rather, IRDAI’s rejection stems from a technical aspect of the relevant provision of the Insurance Act 1938.
IRDAI has cited a provision of the Act that reads “… 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”. A plain reading of this provision would make one think that IRDAI’s reasons for rejection are not completely unfounded. HDFC Life and Max Life had proposed 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 Services and merged with HDFC Life. The transaction would have led to the automatic listing of HDFC Life.
The provision of the Act bars a merger of an insurance company with a non-insurance company. Since the transaction initially involved merger of an insurance company (Max Life) with a non-insurance company (Max Financial Services), the regulatory approval fell through. Although the eventual result would have been the merger of one insurance company with another, why didn’t IRDAI grant its approval given the transaction, ultimately, would have met the requirements of the Act?
The entire saga clarifies one aspect about IRDAI. The regulator looked at every step of the transaction to see if each step of the proposed merger met the requirements as set out in the Act. The debate on whether or not IRDAI was right in its approach will be continue for some time, given that the regulator has, for the moment, hit the brakes on creation of an insurance sector behemoth. However, it must also be kept in mind that the Act, if strictly interpreted, does not seem to provide any room for the regulator to take a discretionary call when faced with situations like this.
Further, the regulator took far too much time—more than six months—to reject the proposal. This lack of clarity at the regulatory end caused much frustration among parties concerned .
The Indian Shining story as well as the ease of doing business efforts will be just mere statements unless regulators show urgency in granting or rejecting approvals.
The insurance sector in India is set to grow leaps and bounds, keeping in mind the fact that the past couple of years have seen considerable steps taken by the government to open up India’s insurance sector, with FDI caps being liberalised and FIPB approvals for foreign investment also done away with. It is only a matter of time that this sector will witness a flurry of M&A activities which will require the regulator to act swiftly and proactively as far as matters such as approval are concerned.
With contributions from CV Srikant, associate, J Sagar Associates and Solicitors