Mumbai: The minority shareholders of Max Financial Services Ltd have cleared a proposal to pay a Rs850 crore non-compete fee to Analjit Singh and other promoters of the Max group.
This was a pre-requisite to the firm’s three-way merger with its unit Max Life Insurance Co. Ltd and HDFC Life Insurance Co. Ltd.
Around 65% of the votes polled were in favour of the resolution to pay the non-compete fee, said a Max Financial notice to the stock exchanges on Tuesday.
This was a crucial hurdle that the company had to clear after proxy advisory firms and even the mutual fund lobby Association of Mutual Funds in India, or Amfi, expressed concerns about the non-compete fee, which they felt was unfair to minority shareholders.
Also Read: HDFC Life-Max merger deal: Amfi warns mutual funds on non-compete fee payment
In the next step, Max Financial Services will have to file the draft scheme of arrangement, along with the voting results, with capital market regulator Securities and Exchange Board of India (Sebi) for its approval. Sebi typically takes 30 days to clear such draft schemes.
Besides, HDFC Life and Max Life are awaiting approval from the insurance regulator, the Insurance Regulatory and Development Authority of India (Irdai), for the merger. On 7 September, Max Life filed the scheme of amalgamation with the Competition Commission of India (CCI), but an approval is yet to come.
According to an 8 August statement, Rs501 crore of the non-compete fee will be paid upfront and Rs349 crore will follow in three equal annual instalments.
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% and foreign investors, including affiliates of Goldman Sachs Group, Inc. and KKR and Co., own 42.8%, stock exchange data showed.
“Insurance is a tough, long-term, capital-guzzling business, which needs tremendous efforts over decades to grow and establish itself. There are rare chances that an entity will leave a business of such nature and will enter such a business again in a few years to put in similar long-term efforts to establish another large insurance firm. If we consider these points, the payment of a non-compete fee is not justifiable," said Prithvi Haldea, founder of Prime Database, a Delhi-based primary market analytics firm.
“Also, since many of the minority shareholders who voted on the proposal are institutional shareholders, they will look at various long-term parameters rather than only stock price prospects, while voting on such a proposal. For such investors, it is the relation with the company and other long-term potential benefits that matter more than stock appreciation," he added.
Also Read: Analjit Singh: All about timing
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 the stock exchanges with a market share of at least 11% in the life insurance space.
Housing Development Finance Corp. Ltd (HDFC) and Standard Life (Mauritius Holdings) 2006 Ltd will be the promoters of the merged entity. HDFC will hold around 42.5% of the merged entity and Standard Life 24.1%. The promoters of Max Financial will hold 6.5%.