Mumbai: Reliance Industries Ltd (RIL) and the Bharti group have called off talks that were to have culminated in the Mukesh Ambani-led company taking a controlling stake in two insurance firms—Bharti AXA Life Insurance Co. Ltd and Bharti AXA General Insurance Co. Ltd.
The deal would have marked RIL’s entry into the insurance business.
Bharti and RIL issued separate statements on Friday after market hours on the failure of the talks. While Bharti was silent on the reason for this, RIL said in its release that it was due to an inability “to reach an agreement on the long-term vision and joint governance of the ventures”.
An official at one of the two Indian sides involved stated that while there were no differences over valuation, RIL and French insurer AXA SA did not concur on the strategy to expand the businesses of the two companies. He spoke on condition of anonymity.
The insurance sector in India, especially life insurance, faces some critical challenges, said Ravi Trivedi, an executive director at audit and consulting firm KPMG.
“These issues are linked to the cost and model of distributing life insurance products,” he said. “Distribution through agents is not seen (to be very) lucrative by companies, who think bank tie-ups are the best way forward.”
There is significant pressure on life insurance companies as they haven’t shown the kind of profitability that they were expected to, Trivedi added.
According to data available with the Insurance Regulatory and Development Authority (Irda), as of 31 March, Bharti AXA Life Insurance ranked 20th among 23 life insurers with collections of Rs 362.4 crore of new business premium. The general insurance company ranked 15th among 19 firms with a gross written premium of Rs 551.48 crore.
Sunil Mittal, chairman, Bharti Enterprises. File photo.
A senior Bharti official said his firm will continue to look for a buyer for its stake in the two insurance ventures. He, too, declined to be identified.
“Both the companies had informally informed Irda about the possible transaction, but were yet to file documents,” Irda chairman J. Hari Narayan said. “Today, both companies informed us that the deal has been called off. There was no regulatory hurdle.”
RIL, India’s most valuable company, and its affiliate Reliance Industrial Infrastructure Ltd were to acquire a 74% stake in the two firms, joint ventures with AXA, from telecom-to-retail conglomerate Bharti Enterprises Ltd. An announcement to this effect was made by RIL and Bharti on 10 June.
Bharti said in its statement that the life and general insurance companies “will continue to develop their operations in India as they have successfully done over the past years”.
According to the original deal, AXA was to continue running the operations of the insurance ventures and even had the option of increasing stakes in the two companies to 50% each from 26% at present as and when regulations allowed it to do so. A foreign partner cannot hold more than 26% in an Indian insurance venture currently.
Since the end of a non-compete agreement with Reliance Group, led by Mukesh Ambani’s younger brother Anil Ambani, RIL is allowed to expand into businesses in which the other is present. The Reliance Group runs life and general insurance operations through its financial services arm, Reliance Capital Ltd.
Consequently, RIL had identified financial services as a potential avenue of growth for the oil-to-yarn and retail conglomerate to deliver returns to shareholders by deploying the significant cash on its balance sheet.
As of 30 September, RIL had cash and cash equivalent to the tune of Rs.61,490 crore. A 22 February HSBC Securities and Capital Markets report estimates RIL will generate $22 billion (Rs 1.1 trillion today) cash by fiscal 2012.