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Axis Bank Ltd is looking to raise its stake in Max Life Insurance Co. Ltd by buying an additional 17.9% stake, two people aware of the matter said, requesting anonymity.

The potential deal will be made in two parts with the private lender taking a 7.9% stake while the rest would be held through its non-banking unit Axis Finance Ltd, the people said, requesting anonymity.

“Axis Bank will value Max Life at par with its current embedded value (EV)," said one of the two people cited above. Embedded value or the sum of net asset value and present value of future profits is a commonly used valuation metric for life insurers.

“Based on that valuation, the deal size will be close to 1,800 crore for 17.9% stake in Max Life. The valuation is at 1x the insurer’s EV, considering more than half of its premium comes through Axis Bank," the person said.

The development comes amid lack of regulatory clarity on how much banks can hold in domestic insurers. In December, Mint reported that the Reserve Bank of India (RBI) had asked lenders to pare stakes in insurers to 30%, as the banking regulator looked to shield banks from risks arising out of their non-banking businesses.

“As part of the deal, Axis Bank is also exploring an arrangement to hold further 10% stake in the form of convertible instruments, including warrants. But the conversion will depend on the final RBI guidelines on permissible holding limits for banks in insurance companies," said the second person cited above.

“If the RBI does allow Axis Bank to hold up to 30% in Max Life, those instruments can be converted into equity but until then the lender would restrict its ownership to 19.9% in the life insurer. The deal contours, however, are still being negotiated and nothing has been finalized yet," the person said.

Max Financial Services holds 72.5% stake in Max Life, while Japan’s Mitsui Sumitomo Insurance and Axis Bank hold 25.5% and 2%, respectively.

Axis Bank and Max Life did not respond to emailed queries.

Max group told exchanges on 20 February that Axis Bank, Max Financial Services Ltd and its unit Max Life are in exclusive talks to explore the possibility of the lender entering into a long-term strategic partnership with Max Life. The companies, however, did not disclose any financial details of the proposed transaction. Max Life depends on the bancassurance channel for nearly 70% of its premium income, of which Axis Bank contributes 60%, while Yes Bank contributes the rest. The bancassurance arrangement between Axis Bank and Max Life is due for renewal in 2021.

“We have not as yet completed the deal. We have just signed a term sheet with an exclusivity period, with the hope and intention that we can get into a definitive agreement later," Amitabh Chaudhry, managing director and chief executive of Axis Bank, said on 24 February. While the deal is subject to regulatory approvals, Chaudhry said, it would allow Axis Bank to get into making insurance products.

“We have been one of the largest distribution partners of insurance in the industry and as we have understood that space, and especially in this case, worked with Max Life for almost 10 years now, we have come to realize that if we have this combination of manufacturing and distribution, we can enhance the value of shareholders manifold in comparison to just being a distribution partner," he added.

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