Axis Bank’s Max Life deal hits Irdai wall

MUMBAI : The country’s third largest private lender Axis Bank’s proposal to form an insurance joint venture (JV) with Analjit Singh-promoted Max Financial Services Ltd through a 29% stake purchase in Max Life Insurance has hit a regulatory wall.

In a letter to Axis Bank and Max Life, the insurance industry regulator, Insurance Regulatory and Development Authority of India (Irdai), has sought a number of clarifications on the clauses in the JV agreement.

Two persons directly aware of the development confirmed this. A Max Financial Services spokesperson said, “It is not appropriate for us to comment on correspondence, if any, with the regulatory authorities."

On 28 April, Axis Bank had announced an agreement to raise its stake in Max Life to 30% from 1% for ₹1,592 crore, with an intention to form a joint venture with Max Financial Services, in which the Axis Bank would hold 30% and Max Financial 70%. The share purchase, at an agreed price of ₹ ₹28.61 per share, will involve Axis Bank purchasing 29% in Max Life from Max Financial which, combined with its existing 1% stake, will take the bank's shareholding in the insurance company to 30%.

In the meantime, it is expected that Mitsui Sumitomo, which currently owns 25.5% in Max Life, will be exchanging its insurance company shares for the holding company's shares. Irdai has raised questions over four key clauses in the agreement, according to the first person cited above. Firstly, Irdai has asked the two companies to clarify on a clause related to a merger of Max Life with Max Financial Services in future. “This clause could be in breach of Section 35 of the Insurance Act. Any JV must first qualify legally," said the first person.

Another key clause in the JV agreement is a “put" option that allows Axis Bank to exit the JV. The agreement says that if the value creation options are not consummated within 63 months of closing the deal, Axis Bank can exercise a put option on Max Financial to sell all its shares in Max Life at a price of ₹294 apiece to Max Financial.

The current deal, at ₹28.61 per share, values Max Life at ₹5,667 crore which works out to a discount of over 60% to its present market value. While Max Life is not listed, Max Financial is a listed firm. The current market value of Max Financial Services, whose entire income comes from Max Life, is around ₹14,252 crore. This is even cheaper than the March deal in which Mitsui Sumitomo Insurance (which holds 25.5% in Max Life now) agreed to swap its Max Life shares with shares of Max Financial, valuing Max Life shares at Rs. 108 apiece.

“Irdai does not want to comment on deal pricing. However, if any partner intends to exit any JV after completion of five years, a fresh application can be made then. A "put" option related to exit need not be explicitly mentioned in the agreement now," said the first person. The insurance watchdog has also asked to change a clause in the agreement that empowers one of the two parties to appoint auditors for the proposed JV.

“This clause gives unfair and unequal powers to one party in the JV and is therefore against the spirit of corporate governance. Key board level processes such as appointment of auditors and top management should be always fair," said the second person. Another clause that Irdai has asked the two companies to remove from the agreement is one relating to the presence of an observer in Max Life’s board meetings.

“The agreement states that there will always be an "observer" who will be present in all board meetings of the proposed JV. This observer could be from Axis Bank or any other entity outside the JV but related to Max Financial. There is no such provision in the existing regulations for having such an ‘observer’ in insurance company’s board meetings. This clause too goes against corporate governance and the JV agreement should avoid such clauses," said the second person.

Currently, Max Financial Services holds a 73.5% in Max Life, Nippon-based Mitsui Sumitomo holds 25.5% and Axis Bank holds close to 1%. If the deal goes through, Max Financial will end up with 70% and Axis with 30%.

Axis Bank, so far, has been Max Life’s bancassurance partner. The JV will give Max Life an equal footing with its bigger rivals SBI Life Insurance, ICICI Prudential Life Insurance and HDFC Life Insurance, all of whom have banks as JV partners.

Source: Live Mint