Axis Bank-Max Life deal: The long road riddled with regulatory concerns

After over six months and three different structures, the deal could be in its final stages of completion

Amitabh Chaudhry may finally heave a sigh of relief. After over six months, the CEO of the country’s India’s third-largest private bank, Axis Bank, could see closure for his stake purchase in Max Life. The deal, meanwhile, has gone through three rounds of restructuring owing to regulatory concerns. So what started as a purchase of 29 per cent stake has finally come down to 19 per cent.
 

The first proposal, in April, to buy another 29 per cent stake (Axis Bank already owned one per cent) was red- flagged by the insurance regulator. The Insurance Regulatory and Development Authority of India (IRDAI) was unhappy with the structure that allowed Axis Bank to have a put option and exit by selling the stake to the listed Max Financial Services (Max Life’s holding company) in slightly over five years if the value-creation options were not consummated. Both companies decided to restructure the “value-creation” clause.
 

In August, the next structure was announced that allowed the Axis Bank to buy 17 per cent stake in Max Life.
 

This time, it hit the Reserve Bank of India (RBI) hurdle. The apex bank advised the bank to adhere to the 10 per cent limit, so that it would not require any regulatory approval. Under the automatic approval route, banks do not require prior approval from the RBI if the proposed investment is less than 10 per cent of the investee company’s paid up capital and the aggregate shareholding of the bank, along with its subsidiaries is less than 20 per cent of the investee company’s paid-up capital. The regulator, it seems, was worried about the bank having an excessive exposure to an insurance company.
 

Now, under the new structure, Axis Bank will acquire 9 per cent while Axis Capital and Axis Securities will together acquire three per cent in addition to other Axis entities having the right to acquire an additional stake of up to 7 per cent in one or more tranches in the next two years.

The question: What makes Max Life so attractive that Axis Bank has been willing to rejig deals multiple times? It has 354 branches, 14,063 employees and 4.45 million policyholders. And the stake purchase will make Axis Bank a joint-venture partner as is the case with HDFC Bank, ICICI Bank and Kotak Mahindra Bank and improve its valuation significantly. Says Mohit Talwar, Managing Director, Max Financial Services Ltd (MFSL): “Subject to regulatory clearances, the joint venture will create another strong player in the industry in the league of other insurance companies in which banks are sponsors and promoters. The total premium generated through this relationship (Max Life and Axis Bank) has aggregated to over Rs 38,000 crore. Both companies have invested extensively in product and need-based sales training, thereby leading to a consistent increase in productivity.”
 

Market participants and experts are also happy with the deal. Says market analyst Ambareesh Baliga: “For Axis Bank, the deal means that they will have a larger bouquet of products to offer to their clients, thereby improving its valuation. And it is a win-win situation for both. Adds Amit Tandon, Managing Director and Founder, IIAS, an investment advisory firm: “Investors like the transactions given that Axis Bank has an insurance business and Max Life has a bank as a partner.”

 

Since Axis Bank is acquiring the stake through the issuance of fresh shares by Max Life, it will help in strengthen the net worth of the insurer firm. “The product ingenuity and extensive reach of the two strong partners will enable the company to have better penetration, including in smaller cities as well, resulting in a healthy rise in the market share,” Talwar added.
 

However, the delay has the investing class a tad worried. While industry experts such as Tandon say that since the RBI delayed giving its approval, investors cannot do much about it. But others believe that sometimes it can derail the entire process. For example, some believe that given that both these companies are listed and their numbers are in the public domain, the deal could have been sealed more quickly. “Such delays in completing deals hurts investor sentiment,” adds Baliga. Adds J N Verma, Managing Director, Stakeholders Empowerment Services, a proxy advisory firm: “These processes should be time-bound so that investors do not suffer any anxiety.”
 

Interestingly, Chaudhry is no stranger to Max Life’s books. In August 2016, when HDFC Chairman Deepak Parekh and Max Group Chairman Analjit Singh announced a grand merger of the two companies, as CEO of HDFC Life, he was spearheading the deal. But after a year, the deal fell through because the IRDAI rejected the merger in the form proposed by HDFC Life, Max Life and MFSL. The process envisaged Max Life’s merger with its parent company, Max Financial Services, followed by the demerger of the life insurance business from Max Financial and merger into HDFC Life. The transaction would have led to automatic listing of HDFC Life through a reverse merger process. IRDAI rejected it because it believed that this was  a violation 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 it.
 

This time around, having met all the conditions of regulators for now, Chaudhry would be expecting better results.