Axis Bank to pick residual stake in Max Life at fair market value

The revision in valuation has been done according to IRDAI guidance

After receiving a rap from insurance regulator Insurance Regulatory and Development Authority of India (Irdai), Axis Bank on Tuesday said it has entered into revised agreements with Max Financial Services. Under these pacts, Axis will acquire the balance 7 per cent equity in Max Life Insurance at fair market value. This would be done using discounted cash flows instead of valuation according to Rule 11UA of the Income Tax Rules, 1962.

“This revision has been done consequent to the guidance received by Max Life from the Irdai,” the bank said in a notification to the exchanges.

Irdai had imposed monetary penalties on Axis Bank and Max Life Insurance because it had found certain violations of its directions in transfer of shares of Max Life between Max Financial Services and Axis Bank as well as its subsidiaries.

Max Life was asked to pay Rs 3 crore as penalty and Axis was told to pay Rs 2 crore.

In its order, Irdai had noted that the promoters of Max Life Insurance — Max Financial Services — were engaging in the transfer of shares of the insurer to Axis Bank at a price, which is substantially lower than the fair market value.

And subsequently, Max Financial bought the same shares from the bank at a substantially higher price. Axis Bank had sold 0.998 per cent equity shares at a price of Rs 166 per share.

Subsequently, Axis Bank and its group companies bought 12.002 per cent shares within 22 days at a price range of Rs 31.51–32.12 per share. This was based on valuation as envisaged under Rule 11UA. Axis entities bought a 12 per cent stake in Max Life Insurance from Max Financial Services for Rs 736 crore. 

Therefore, there is no uniform basis for the determination of price for the transfer of shares, the regulator had noted in its order.

Axis Bank and its subsidiaries — Axis Securities and Axis Capital — collectively hold 12.99 per cent equity in Max Life Insurance.

The bank has a right to acquire an additional stake of up to 7 per cent in Max Life, in one or more tranches.

Recently, Max Financial Services received Irdai’s approval to purchase the balance stake of 5.17 per cent in the life insurance company held by Mitsui Sumitomo Company (MSI). This transaction entailed purchase of 99.1 million shares of Max Life at Rs 85 per share by Max Financial Services. It is according to the put/call option approved by the Max Financial’s board on March 3, 2020.

Max Financial Services held 72.52 per cent stake in Max Life Insurance while MSI had 25.48 per cent stake.

After executing the share-swap agreement, Max Financial Services swapped the 20.57 per cent stake of Max Life held by MSI for 21.87 per cent of its own stake.

Subsequently, MSI bought 0.26 per cent stake in the life insurance company from Axis Bank and was holding 5.17 per cent stake in Max Life.

Post acquiring the 5.17 per cent stake from MSI, Max Financial Services’ stake in the life insurance company is 87 per cent. The rest is held by Axis Bank.

Max Financial Services had been waiting for this approval from the regulator for over a year now.

In the earnings call, the company had mentioned that after receiving the regulator’s approval for the balance stake buy from MSI, it would apply to Irdai for the balance share transfer of 7 per cent of Max Life to Axis Bank.