HDFC Life-Max merger deal: Amfi warns mutual funds on non-compete fee payment

Amfi advises AMCs to oppose proposal to pay Rs850 crore non-compete fee to Max Group promoters as part of the HDFC Life-Max Life merger deal


Max Group promoter Analjit Singh. The HDFC Life-Max Life merger will create the country’s largest private sector life insurance company and will  lead to an HDFC Life Insurance IPO. Photo: HT
Max Group promoter Analjit Singh. The HDFC Life-Max Life merger will create the country’s largest private sector life insurance company and will lead to an HDFC Life Insurance IPO. Photo: HT

Mumbai: The Association of Mutual Funds in India (Amfi) has advised asset management companies (AMCs) to oppose the proposal to pay a Rs850-crore non-compete fee to Analjit Singh and other promoters of the Max Group as part of the merger of HDFC Life Insurance Co. Ltd and Max Life Insurance Co. Ltd, said four people with direct knowledge of the matter.

Max Financial Services Ltd, which owns Max Life Insurance, is currently seeking votes from its minority shareholders on the non-compete fee payment proposal. Voting ends on 24 September, according to the notice it sent to stock exchanges.

At the end of June, minority shareholders owned 69.55% of the firm, and more than half of them have to agree for this deal to go through. Of this, mutual funds held 16.71%, stock exchange data showed. This shareholding is spread over 19 AMCs.

While Amfi’s proxy voting committee was unanimously in support of the deal which it felt creates value of all shareholders, the panel also saw the non-compete fee as unwarranted and unfair, the mutual fund body wrote to its members.

The proxy advisory committee, created in 2014, was formed with an aim to jointly thwart decisions made by promoters or management of listed companies that may not be in the interest of minority shareholders. This committee generally meets before crucial voting matters.

To be sure, Amfi’s panel is an advisory body and its recommendation are not binding on mutual funds.

“An AMC need not necessarily agree to this particular recommendation of Amfi and it can independently take its call on voting on the proposal on the basis of its investment objectives and the interest of its unit holders,” said one of the four people.

None of the four wished to be named as the matter is sensitive and can potentially influence the shareholders’ voting.

C.V.R. Rajendran, chief executive officer, Amfi, declined to comment on the issue, terming it as a highly sensitive one.

When contacted late on Wednesday, a Max Financial spokesperson said the company will be able to respond on the matter only on Thursday.

In a meeting on Tuesday, the Amfi board, which includes the heads of 14 AMCs, several among them Max Financial shareholders, also discussed the non-compete fee, said three of the four people.

“While some members felt that each AMC should individually vote, others felt that the AMCs should collectively take a stance and send their decision along with the rationale to Securities and Exchange Board of India (Sebi) and Analjit Singh,” said the second person.

This is not the first time that mutual funds have grouped together on such an issue. A year ago, AMCs came together to oppose proposals such as Maruti Suzuki India Ltd’s plan to allow parent Suzuki Motor Co. to build its own factory in Gujarat, reported a 11 December story by The Economic Times.

Others have also voiced concerns about the non-compete fee. On 6 September, proxy advisory firm Institutional Investor Advisory Services (IiAS) recommended public shareholders to vote against the proposal saying that the “rationale behind the non-compete fees is unclear”.

“The large stake by itself should act as a deterrent for Max Financial Services’ promoters from starting a competing business in the life insurance industry,” said an IiAS report.

“Additionally, the non-compete fees are being paid by the merged entity (HDFC Standard Life + Max’s life insurance business), which implies that Max Financial Services’ minority shareholders will bear part of the expenses. As non-compete fees, the promoters receive over Rs100 per share in addition to the shares of the combined entity—which is a 21% premium over the returns for non-promoter shareholders,” the report added.

The results of the shareholder voting on the proposal is likely to be disclosed by Max Financial Services on 27 September. If shareholders approve the payment of non-compete fees with at least 51% majority, the merger will enter its next stage as planned.

The merger will create the country’s largest private sector life insurer with total assets more than Rs1.1 trillion and will lead to the eventual listing of HDFC Life on stock exchanges.

Sponsored Links by Revcontent