Mumbai: The boards of HDFC Life Insurance Co. Ltd and Max Life Insurance Co. Ltd on Monday signed off on their merger, which will create India’s largest private-sector insurer.

It may also set in motion the process of long-awaited consolidation in the insurance sector.

With 1.1 trillion of assets, the merged entity will overtake ICICI Prudential Life Insurance Co. Ltd as India’s No. 1 non-government insurer, although it will be dwarfed by state-owned Life Insurance Corporation of India (LIC), which had 21.70 trillion of assets at the end of March 2016.

Under the three-step merger process, Max Life will first combine with its parent Max Financial Services Ltd. In the next stage, the insurance unit will be demerged from this entity into HDFC Life. Finally, the non-insurance businesses of Max Financial will merge into group company Max India Ltd.

The boards of all four firms approved the terms, the companies said in a joint statement.

The deal envisages shareholders of Max Life getting one share of Max Financial for every 4.98 shares of Max Life. In the second step, shareholders of Max Financial (after the amalgamation with Max Life) will get 2.33 shares of HDFC Life for each share they hold, said the statement.

If all the Max entities are considered as one set and HDFC Life as another set, then effectively, “every share of HDFC Life costs around 2.25 shares of the merged Max Life and Max Financial entity", said Amitabh Chaudhry, managing director and chief executive of HDFC Life.

“The swap ratio is just fine and in line with expectations," said Santosh Singh, BFSI and head of research, Haitong Securities India Pvt. Ltd.

Shares of Max Financial have gained 14.7% since 17 June, when the merger was first proposed, compared with 5.85% for the BSE’s benchmark Sensex.

Housing Development Finance Corp. Ltd (HDFC) and Standard Life (Mauritius Holdings) 2006 Ltd will be the promoters of the merged entity, which will be named HDFC Life and also be a listed company. It will also licence the Max brand for seven years after the completion of the transaction.

HDFC will cease to be the holding company of HDFC Life post the merger and will hold around 42.5% of the merged entity, said the joint statement. The housing financier currently holds 61.6% of HDFC Life. Standard Life will own 24.1% in the merged entity. The promoters of Max Financial, essentially Analjit Singh, his family and related family firms, will hold 6.5% in the merged company and also get a non-compete fee of 850 crore. The total foreign shareholding in the merged entity will be 41%.

According to this valuation and exchange ratio, the relative valuation of HDFC Life and Max Life would be 69% and 31% respectively, the statement said. The whole merger process can take anywhere from 12-15 months, said the companies.

The scheme of arrangement has to get regulatory nods from the Competition Commission of India, the Insurance Regulatory and Development Authority of India, the Securities and Exchange Board of India (Sebi) and a high court.

Max Life will need the nod of 75% of its shareholders for going ahead with the deal.

Moreover, Max Financial Services will need the approval of its public shareholders (who hold 69.5%) for the payment of the 850-crore non-compete fee to its promoters. The public shareholders of Max Financial include mutual funds who hold a collective 16.71%. Foreign public shareholders include International Finance Ltd and Xenok Ltd, which together own 12.01%. According to the statement, 501 crore of the non-compete fee will be paid upfront and 349 crore will follow in three equal annual instalments.

This could be a sticking point in the transaction.

“The basis of this non-compete fee is not clear and how this is being factored in while compensating shareholders, both public and promoters," said Amit Tandon, founder and managing director of proxy advisory firm Institutional Investor Advisory Services.

“Compensation in whichever form (shares, monetary compensation etc) being given to promoter should be equal to the one being given to public shareholders. In case the compensation being offered to promoters is higher than what has been given to public shareholders, then it is against the spirit of protecting shareholders’ interest and regulations (takeover code) and the transaction would be liable to be scrutinized by the regulator," said Shriram Subramanian, founder and managing director, InGovern Research Services, another proxy firm.

Sebi has in the past typically frowned on such clauses in mergers and acquisition deals.

“The proposal for the agreed non-compete fee for Analjit Singh will be placed before the minority shareholders of the merged entity. If they vote with two-thirds majority on the proposal, only then it will be approved and Sebi should not have any issue with that," said Deepak Parekh, chairman, HDFC, which will be the largest shareholder in the merged entity.

The combined entity will have a 10.8% market share. HDFC Life and Max Life together collected premiums of 25,529 crore in the year ended March.

According to Haitong’s Singh, there are a couple of benefits to the merger. One, it will be able to save costs as the expense ratio improves significantly. Second, the expanded distribution network will allow them to grow faster.

“The growth rate of the company will have an upside Delta of about 2-3 percentage points, which means if the two companies are growing at around 10% annually right now, the merged entity can grow at 12-13% every year, " he said.

Jayshree P. Upadhyay contributed to this story.

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