The merger of Max Financial Services Ltd, its unit Max Life Insurance Co. Ltd and HDFC Life Insurance Co. Ltd will be an all-stock deal, said two people with direct knowledge of the matter. Under a two-step process recommended to the boards of the companies, Max Life will first get merged into Max Financial in a 1:1 share swap ratio. Then, shareholders of HDFC Life will get 24 shares of this expanded Max Financial for every 10 shares they hold, the people said, requesting anonymity as the deal is still in the works.

The share swap ratio will be considered by boards of Max Life and HDFC Life when they meet separately on Monday.

To be sure, the plan needs to be cleared by the respective boards, ratified by shareholders, and approved by a high court.

On 17 June, the Max companies, promoted by Analjit Singh, said they will merge with HDFC Life to create an insurance giant with 1.1 trillion in assets. The new company may be valued at upwards of 45,000 crore, according to the people cited above. It would become India’s largest private sector life insurer, overtaking ICICI Prudential Life Insurance Co. Ltd.

“While the valuation of HDFC Life is worked out at around 29,000 crore, the value of the combined value of the entity created through the merger of Max Life and Max Financial Services is pegged at around 16,000 crore," said the first of the two people.

Emails sent to HDFC Life and Max Life on Saturday remained unanswered while calls made to the top management were not returned.

Under the share swap agreement, existing shareholders of HDFC Life will own 68.66% of the merged entity, while existing shareholders of Max Life and Max Financial will hold the remaining 31.34%.

While Housing Development Finance Corp. Ltd (HDFC), promoter of HDFC Life, will hold 42.32% of the new merged entity, UK-based Standard Life Plc will own 24.03%.

Currently, HDFC holds 61.63% in its insurance unit while Standard Life owns 35%, according to the insurance company’s 2015-16 annual report.

Max Financial—in which Analjit Singh, his family and group firms hold a 30.45% stake—owns 68% of Max Life, according to regulatory filings. Foreign shareholders including Mitsui Sumitomo hold 25%.

The stakes of promoters and existing public shareholders of Max Financial in the new entity will depend on the structure of Max Life’s merger with its parent. One option is that Max Financial, which holds a 68% stake in Max Life, could get shares allotted of itself, i.e., treasury shares.

Another possibility is to allot shares directly to the shareholders of Max Financial—like what happened when IDFC Ltd shareholders were given shares in IDFC Bank.

This means that promoters and public shareholders of Max Financial will get additional shares in the firm, in proportion to their holding in Max Life.

In that case, the current promoters of Max Financial, which includes Analjit Singh and related entities, will own 6.86% of the merged entity while its public shareholders will hold 15.68%. “According to our calculations, the stock of Max Financial is pricing in a share swap of 1:2.1," said Santosh Singh, head of research at Haitong Securities India Pvt. Ltd. “Anything more than that and we believe that the stock will react negatively.

The stock of Max Financial has gained 16.54% on BSE since the merger was announced on 17 June, compared to a 5.45% gain for the benchmark Sensex.

“There are synergies between the two entities, but markets will watch out for factors such as retaining of key people. These are asset-light businesses where the core team forms an essential part of the business and helps in building a credible franchise," Singh added.

The two-step process “will enable HDFC Life to get listed automatically. The swap ratio will need both boards’ approvals and a court approval. After the boards of the companies approve the terms, the agreements will be submitted to the court," said the first of the two people cited earlier.

“The court approval process will take up to nine months and after that, the listing process of HDFC will start. The total process till listing of HDFC Life may take up to a year," this person.

“There have been intense negotiations on the shareholding pattern. That was the scene till last week. Given there will be a long weekend coming up, the pressure has to build up between both the parties to come to a conclusion," said the second person. The 60-day mutually agreed upon exclusivity period ends on 15 August.

Last year, Max India underwent a three-way split and created Max Financial Services as the listed holding company for the insurance business of Max Life. Following the demerger, Analjit Singh sold a 9.5% stake in Max Financial Services to private equity firm KKR.

At present, a majority of HDFC Life’s product portfolio consists of unit-linked insurance products (Ulips), while traditional life insurance products contribute the most to Max Life’s portfolio.

If the merger goes through, it may trigger a long-awaited consolidation in the industry, which has assets under management of 22.4 trillion, of which the share of India’s 23 private sector insurers is only about 4.61 trillion, according to the Insurance Regulatory and Development Authority of India.

HDFC Life, the third largest private life insurance company in terms of first-year premiums, collected a total first-year premium of 6,488 crore in the year ended 31 March.

In the same fiscal, Max Life collected a total first-year premium of 2,882 crore. HDFC Life posted a net profit of 818 crore and Max Life 439.1 crore in the year ended 31 March.

anirudh.l@livemint.com

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