Newest JV in town – Axis Bank and Max Life

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Axis Bank has proposed to develop an insurance joint venture with Max Financial Services Ltd for a 29% stake investing in Max Life Insurance has hit a regulatory wall. Axis Bank had decided to inflate its stake in Max Life from 1% to 30% for ₹1,592 crores, intending to form a joint venture with Max Financial Services, in which the Axis Bank would carry 30% and Max Financial with 70%. The share purchase is agreed at ₹ ₹28.61 per share. In the meanwhile, it is anticipated that Mitsui Sumitomo, currently owns 25.5% in Max Life, will be switching its insurance company shares for the holding company’s shares. 

IRDAI has urged both the companies to define a clause related to a merger of Max Life with Max Financial Services in the eventuality. “This clause could be in breach of Section 35 of the Insurance Act. Any joint venture must qualify legally,” said a spokesperson. Another principal clause in the joint venture agreement is a “put” option that lets the Axis Bank exit the JV. The agreement says that if the value creation options are not fulfilled within 63 months of concluding the deal, Axis Bank can exercise a put option on Max Financial to sell all its shares in Max Life at ₹294 apiece to Max Financial.

The current deal is 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. Max Life is not listed and Max Financial is a listed firm. The current market value of Max Financial Services, whose complete income comes from Max Life, ₹14,252 crores. This is even more economical than the March deal in which Mitsui Sumitomo Insurance (which holds 25.5% in Max Life now) agreed to barter its Max Life shares with shares of Max Financial, valuing Max Life shares at Rs. 108 apiece. “IRDAI does not want to reflect on deal pricing. However, if any partner plans to exit any JV after completion of five years, a fresh application can be made then. A “put” option associated with the exit need not be explicitly mentioned in the agreement now,” said a spokesperson.

The IRDAI has also asked to change a clause in the agreement that authorizes one of the two parties to appoint auditors for the proposed joint venture. “This clause gives unfair and unbalanced powers to one party in the JV and is hence against the spirit of corporate governance. Key board-level processes such as the appointment of auditors and top management should be always fair,” said a spokesperson.

Another clause that IRDAI has urged the two companies to eliminate from the agreement is one associating with the presence of an observer in Max Life’s board meetings. “The agreement insists that there will always be an “observer” who will be present in all board meetings of the suggested joint venture. This observer could be from Axis Bank or any other entity outside the JV but related to Max Financial. There is no such stipulation in the current regulations for having such an ‘observer’ in insurance company’s board meetings. This clause goes against corporate governance and the JV agreement should avoid such clauses,” said the spokesperson.

Currently, Max Financial Services owns a 73.5% in Max Life, Nippon-based Mitsui Sumitomo has 25.5% and Axis Bank has about 1%. If the deal works, Max Financial will settle with 70% and Axis with 30%. Until now, the Axis Bank has been Max Life’s bancassurance associate. This JV will give Max Life an equal standing with its competitors SBI Life Insurance, ICICI Prudential Life Insurance, and HDFC Life Insurance, all of whom have either banks or NBFCs as JV partners.

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