It is a curious situation, and one which the two parties – HDFC Life and Max Life –, their investment bankers, and even the insurance industry is following carefully. The country’s largest insurance merger between HDFC Life and Max Life is yet to pass the regulator – the Insurance Regulatory and Development Authority’s (Irdai’s) – litmus test even after nine months. And both the insurers, heavyweights in their own right, are completely unaware of the direction it is likely to take.
What is more frustrating for all parties is not just the delay, but the lack of decision making. “If Irdai wants the deal to be restructured, it should inform us. But saying/doing nothing for months together is quite frustrating, and also sends out a bad signal to the industry,” said an investment banker close to the deal.
Meanwhile, since the announcement of the deal, the Max Financial market capitalisation rose from Rs 14,500 crore to Rs 18,000 crore, only to fall sharply after it was reported that HDFC Life is getting ready for an initial public offering. On Monday, its market cap stood at Rs 14,394 crore, lower than its market cap before the deal was announced.
So, where is the roadblock? There seems to be some confusion over the interpretation of Section 35 of the Insurance Act, 1938, which says that no life insurance business of an insurer can be transferred to any person, or transferred to or amalgamated with the life insurance business of any other insurer, except in accordance with a scheme prepared under the section and approved by the Irdai. Consequently, Irdai had sought the approval of the Attorney General (AG) for the deal. Added the investment banker: “Before we decided the structure, we checked with several leading lawyers, including a former Chief Justice of India.”
Things have gotten more difficult after the Attorney General (AG) returned the papers to the insurance regulator without any comment. Now, both the companies, investment bankers and even the industry are wondering what will be Irdai’s verdict. “It is a difficult one for the regulator for two reasons: if it allows the deal to go through, then people will question its earlier decision to refer it to ministries. Also, a precedent will be set where other companies may also want to merge with holding companies. On the other hand, if it does not allow the deal to go through or seeks severe restructuring, then it might be seen as being a regulator which is not helping the industry grow,” said a consultant.
This is, perhaps, the biggest challenge that Irdai is facing since the time it was set up in 1999. The earlier big challenge came in 2010, when the Securities and Exchange Board of India under former chairman C B Bhave and Irdai (then called Irda) under G Hari Narayan crossed swords over the jurisdiction of unit-linked insurance plans (Ulips). While Sebi had claimed that Ulips, being investment-cum-insurance products should be governed by it, Irda felt otherwise. Irda, that time, received support from then-Finance Minister Pranab Mukherjee and kept its jurisdiction over Ulips. Interestingly, Mukhergee went on to justify the setting up of Financial Stability and Development Council to the Parliament by giving this example: “What do you expect me to do, will I remain a mute spectator, if they (regulators) quarrel like petulant children?"
The time around, the battle is within. On one hand, Irdai does not want to be seen as an anti-industry regulator, say industry experts. On the other hand, it also needs to ensure that the laws under the Insurance Act are followed. Few people would want to be in current Irdai’s Chairman T S Vijayan’s shoes.