The Indian insurance sector has shown a remarkable
growth after year 2000, when entry of private domestic and foreign companies in
the Indian insurance sector was allowed. The removal of entry barriers also
promoted many foreign companies to invest in the insurance sectors. However,
despite such rapid growth the sector has failed to witness many successful
mergers and most of the insurers are opting of IPOs. One example of failed
merger is that of HDFC Life –Max Life merger deal which was once termed a
biggest merger in insurance sector. The main reason for the failed was the
IRDAI’s rejection of the merger scheme because of its non-compliance with
section 35 of the Insurance Act, 1938. The essay seeks to understand the
concept of merger failure in life insurance sector with special reference to
the failure of HDFC Life-Max Life merger deal. It also provides a detailed
analysis of the trends in global insurance sector as well as Indian insurance
sector.  The essay explains the proposed
HDFC Life –Max Life merger deal and enquires into the various reasons of
failure of this deal. It also explains the legal provisions governing the
mergers in insurance sector along with the application of these provisions on
the said deal. The essay also seeks to understand why most of the insurers are
undertaking IPOs and not undergoing the process of mergers.

Keywords: Insurance sector, mergers,
HDFC Life, Max Life, Initial Public Offer (IPOs).  











Merger is one of
the preferred modes of corporate restructuring followed by corporate entities
today. It refers to a combination of two or more companies in which the assets
and liabilities of the selling firm (s) are absorbed by the buying firm.1   There
may be different reasons for undertaking mergers such as competitive advantage,
increasing profit, cutting cost, etc. However, it is not necessary that all
mergers and merger deals end up being successful, the possibility exists that a
merger may fail due to a lack of strategic planning, improper execution, illegality,
disapproval by regulatory authorities, etc. One key example in recent times is the
HDFC Life – Max Life merger deal failure which was touted as the biggest merger
in life insurance sector. Failure of this merger is reflective of the recent
trend of insurers opting for initial public offerings (IPOs) – such as ICICI
Lombard opted for IPO raised an amount of Rs 5700.94 crore.2


Insurance sector
is one of the major sectors in economies of various countries and plays a
crucial role in strengthening the economy of the country. The global insurance
sector is expected to grow by 4.5 % p.a. on in 2017 and 2018.3 The
number of mergers and acquisition in insurance sector are expected to increase in
2017 and some 84 % of insurers plan to target 1-3 acquisitions in 2017 plus at
least one divestiture is expected by 94 % of the insurers.4 However,
the trends are quite different in India where the insurance companies are going
for IPO rather than unsuccessful mergers. The Indian insurance industry consists
of 58 insurance companies out of which 24 are in life insurance business and 33
are non-life insurers and one re-insurer.5

India’s life
insurance sector is the biggest in the world and recorded a growth rate of 22.5
% in FY 2015-16.6 However, most of the life
insurers are going for IPO after the relaxation of capital raising norms by the
Insurance Regulatory and Development Authority of India (IRDAI). In 2017,
insurers like ICICI Lombard, SBI Life, GIC, Reliance Nippon Life, New India and
HDFC Life have raised huge amounts through IPOs.


HDFC in a press
release in June, 2016 announced to enter into an exclusive agreement with Max
Life and Max Financial Services Limited (MFSL) to evaluate the strategic
combination.7 This was seen as a shift
from HDFC Life’s earlier decision of getting listed by undertaking an IPO. In August
2016, the board of directors of each of the companies involved approved the
scheme and sent the details of the deal to three key regulators of mergers in
insurance sector namely the Securities and Exchange Board of India (SEBI), the
Competition Commission of India (CCI) and the Insurance Regulatory and
Development Authority of India (IRDAI). In the meantime, the consent of
shareholders of the companies was obtained and the scheme was approved by
majority shareholders of MFSL and Max India. A joint application of the
combination was also filed with the competition regulator CCI for its approval.
In November, 2016 a disclosure regarding the merger scheme was made to the
Bombay Stock Exchange (BSE) in which the IRDAI had reservations regarding the scheme
and it refused to accept the scheme8 as
it was against the mandatory provisions of the insurance laws of the country.
Since the proposed deal involved complicated combinations, the IRDAI requested
the Union Law Ministry for the opinion of the Attorney General which was denied.
Thus in June 2017, the IRDAI confirmed its earlier position and rejected the
deal. After the rejection, the companies tried to design an alternative scheme
of merger, however, they failed to do so and the merger completely failed when MFSL
disclosed to BSE that the agreement is ‘not being extended.’9


HDFC Standard Life Insurance Company Limited (HDFC

HDFC Life is a
joint venture between HDFC and Standard Life Aberdeen plc, which is a foreign investment
Company. At the time of the proposed scheme, HDFC had 61.5 % stake in the joint
venture while Standard life had stake of 35% in the same.10
It is one of the leading life insurer in the private sector which recorded a
4.2 % rise in the net profit at Rs 818 crore for Fiscal year ended in 2016.11

Life Insurance Company Limited (Max Life)

Max Life is an
unlisted private company which was originally established under the name Max
New York Life Insurance Co. Ltd. which is a joint venture between Max Financial
Services Ltd. (MFSL) and Mitsui Sumitomo Insurance Co. Ltd.12 In
November 2017, MFSL had a stake of 72.1 % in the joint-venture while remaining stake
was owned by Mitsui.13

Max Financial Services Limited (MFSL)

MFSL is a listed
Indian investment company under Max Group and owns a majority stake in Max Life
which makes it India’s first listed company which entirely focuses on life
insurance sector.

Max India Limited (Max India)

Max India is multi-business
corporate which was divided into three units – life insurance unit, health and
allied business and manufacturing unit.14
The original name of the company was Taurus Ventures Limited. Max India also
holds three listed companies namely Max Healthcare, Max Bupa Health Insurance
and Antara Senior Living.


The proposed
merger between HDFC Life and Max Life involved a three-step process which are
as follows:

Merger of Max Life
with Max Financial Service Limited

The first step
involved the merger of Max Life into its holding company MFSL. According the
scheme, shareholders of Max Life would have received one share of MFSL for
approximately five shares of Max Life.15 This
merger would have resulted in transfer of entire business including assets and
liabilities to MFSL.

Demerger of Life
Insurance undertaking of Max Financial Service Limited into HDFC Life

After the
completion of step 1, the resultant merged entity would have demerged its
life-insurance undertaking into HDFC Life. Further, the shareholders of MFSL
would have received 2.33 shares of HDFC Life in return of each share of MFSL.16

Merger of
remaining business of Max Financial Service Limited with Max India.

The third and
final step was of the merger of MFSL, which would have held the remaining
non-life insurance business after demerger, with Max India which is a listed
company. The shareholders of MFSL would have received 1 share of Max India in
return of every 500 shares of MFSL. Completion of this step would have resulted
in creation of a listed merged entity.




§  Provisions of the Companies Act, 2013.

Section 230 to 234
of the Companies Act, 2013 are the essential provisions which govern mergers in
India. 230(5) makes it mandatory for the company to send a notice regarding the
scheme to authorities such as SEBI, CCI, income tax authorities, stock
exchanges and the regulators (IRDAI in the present case). Section 231 deals
with the power of National Company Law Tribunal (NCLT) to regulate the
implementation of merger scheme while section 232 the procedure and rules of
mergers and amalgamation of companies. The power to sanction a compromise or
arrangement a listed company and an unlisted company is vested with the
Tribunal and unlisted company will remain unlisted till the time it becomes a
listed company.17 These provisions where
not notified when the proposed scheme was submitted to the Court under
Companies Act, 1956. However, after notification of these section an alternative
scheme was submitted to the Tribunal.

§  Provisions under Insurance Laws.

Section 35 of the
Insurance Act, 1938 provides that the transfer of or amalgamation of one life
insurer with any other life insurer can only be made in accordance with a
scheme prepared under the section and the scheme must be sanctioned by the
Authority.18 Sub-section (2) makes in
necessary for the parties to provide the agreement of the transfer in the
scheme itself. A ‘notice of intention’ of making such application must be sent
to the Authority along with certified copy of the documents at least two months
before filing such application. The IRDA (Scheme of Amalgamation and Transfer
of Life Insurance Business) Regulation, 2013 prescribe a two-stage process involving
a pre-transaction in principle approval stage and a final approval to give
effect to amalgamation or the transfer after all regulatory and statutory
approvals have been obtained.19After
the in principle approval by IRDAI, it is necessary to obtain approval of NCLT,
Reserve Bank of India (RBI),  Foreign
Investments and Promotion Board (FIPB), SEBI and CCI. However at the stage of
final approval, the IRDAI has final power to decide and regulate the merger and
amalgamation of insurance companies.20
The Regulations also provide that IRDAI may disapprove the scheme of merger on
the grounds of non-compliance with the applicable laws, lower solvency margin
of the merged entity, if the scheme is adverse to the best interest of the
policy holder and if the scheme is hampers the orderly growth of the sector.21

§  Provisions under Foreign Investment Norms

The FDI Policy
2016 (which was prevalent at the time of deal) and Rule 6 of the Indian
Insurance Company (Foreign Investment) Rules, 2015 provides an upper limit of
49 % in case of foreign investment in an Indian insurance company. Under the
Foreign Investment Rules, an Indian insurance company is under an obligation to
ensure that company is under Indian ownership and Indian control as provided in
clause (k) and (l) of rule 2.22Thus,
in order to insure ‘Indian ownership’ and ‘Indian control’ of an insurance
company it is necessary that 50% of the equity capital is owned by a resident
Indian citizen or an Indian company which also controls the company.

§  Provisions under SEBI Regulations.

A company has to
follow certain regulations of SEBI including SEBI (Issue of Capital and
Disclosure Requirements) Regulations, 2009 to get listed on a stock exchange by
public issue. Also, under Regulation 10 (1) (d) of SEBI (Substantial Acquisition
of Shares and Takeovers) Regulations, 2011 an exemption is provided to merger
which in pursuant to order of Tribunal or any competent authority and the
companies are not obliged to make an open offer for takeover. Since the
Takeover Regulations are not applicable to the schemes of mergers, there is no
restriction on payment of non-compete fees to the promoters.

§  Provisions under the Competition Law

Section 5 and 6 of
the Competition Act, 2002 provides the merger control scheme under competition
law. Section 5 explains the concept of combinations which includes acquisition,
merger and amalgamation of enterprises. Section 6 provides for regulation of
such combination which adversely affects in the relevant market and explicitly
states that such combination would be void. Apart from the provisions of the
Competition Act, the CCI (Procedure in regard to transaction of business
relating to combination) Regulations, 2011 also govern the combinations and
provides for the procedure for approval of such combination.



The main issue and
the ground of rejection of the deal was non-compliance with section 35 of the
Insurance Act, 1938. The section permits merger of one insurer only with
insurance business of another insurer. Insurer, under the said Act, means any
company whose sole purpose is to run a business of life insurance or general
insurance or re-insurance. The IRDAI while considering the merger scheme,
applied strict rule of interpretation in order to interpret section 35 and
definition of insurer and rejected the scheme. The first step of the scheme
involved merger insurer Max Life with MFSL which is not solely engaged in
insurance business. This highlights the lacuna in the law as section 6A of the
same act allows the insurer to transfer the shares to any person including
another insurer if the paid up holding of Transferee Company does not exceeds 5
% of paid up capital. Also, absence of any judgement or precedents on
interpretation of the section adds to the legal conundrum. Thus, the law itself
is ambiguous as shares of an insurer can be transferred to any person under
section 6A but the merger of an insurer can only be with an insurance company
under section 35.

However, the
parties involved in the scheme relied on the composite scheme of arrangement
provided under the Companies Act, 2013 and advocated the legal validity of the
scheme. According to the provisions of section 230 to 233 of the Companies Act,
2013, a merger may be carried out in multiple stages.  Being a composite scheme governed by a single
order of the Tribunal and regulatory authorities, any stage of the scheme
should not be looked in insolation as all steps of the amalgamation process
need to be necessarily completed for the implementation of the merger.23
It was unjustified on the part of IRDAI to isolate the stage and consider its
legal validity rather than considering the scheme as a whole.

Another important
legal issue surrounding the scheme was of violation of foreign investment
norms. The maximum permissible limit of foreign investment in insurance sector
is 49 % and the IRDA (Registration of Companies) Regulations, 2000 explains the
manner of calculation of total foreign investment in an insurance company.
According to the Regulations, the foreign investment must be calculated on the
basis of the shares held by foreign investor directly or indirectly in the
insurance company and Indian promoter. Thus, the shareholding of the foreign
investor i.e. Standard life must be considered.  After the competition of the scheme, the
Standard Life would have held a share of 24.1 %24
which is much below the threshold limit of 49 %.  Though the foreign investment in the merged
entity would have been less than the threshold limit but the merged entity
would have violated rule 4 of the Insurance Company (Foreign Investment Rules),
2015 as the scheme did not provide for ownership and control of merged entity
by an Indian company under Indian ownership and control.  This scheme essentially violated the
‘applicable laws’ as 77% share of HDFC is owned by non-residents.25

The scheme
provided for a payment of high non-compete fees to promoters of the MFSL which
could adversely affect the interest of minority shareholder. However, the
payment high of non-compete fees did not violate the provisions of SEBI (SAST)
Regulations, 2011 as the merger scheme was exempted under regulation 10(1) (d).


The completion of
this merger deal would have resulted in creation of the biggest insurance
company in private sector with an estimated value of 10 billion USD.26
Success of this merger would have benefited both HDFC Life and Max Life by
reducing the operational costs and increasing the market penetration. The
merged entity was expected to attain a market share of 12.4 % of the total
private life insurance sector27
along with increased customer base. The merger of giants like HDFC Life and Max
life would have given an additional infrastructural advantage to the merged
entity along with combined resources.

The failure of
this merger deal forced HDFC Life to undertake IPO and get listed rather than
getting listed by the process of reverse listing. The failure of the merger
deal has adversely affected the life insurance sector as the merger of HDFC
Life and Max Life would have created a  merged entity with
net premiums of Rs 25, 529 and solvency of around 252 %,28which could have
promoted a healthy competition and stability in insurance sector.









In November 2017,
after the failure of Insurance sector’s biggest merger, HDFC Life raised an
amount of Rs. 8,695 crore by undertaking an IPO.29
In the same year, insurers like ICICI Lombard, SBI Life, General Insurance
Corporation, Reliance Nippion have raised huge amounts by undertaking the process
of IPO. The increase in number of IPOs by insurers highlights the fact that
insurers are now preferring to undertake IPOs rather than the complex process of
merger in order to strengthen their market position. One of the primary reasons
for an upsurge in number of IPOs by insurance companies is lacuna in the
regulatory laws governing the merger schemes. Lack of clarity on the
interpretation of section 35 and 6 of the Insurance Act and the excessive power
vested in IRDAI has forced the insurers to avoid the process of mergers. On the
other hand, IPO is now seen as the best alternative available to the insurers
to improve their market position by generating huge capital. Thus, in order to
promote mergers and acquisitions in insurance sector there is a need to issue
guidelines in order to bring clarity in the governing laws. Also, it is
necessary that there must be a check on the exercise of power by IRDAI and
certain exemptions must be granted in order to remove barriers for the process
of mergers in insurance sector.

1 Andrew Sherman and Milledge Hart,
Mergers and Acquisitions from A to Z (New York: Amacon, 2006), 11.

2 “ICICI Lombard’s Rs 5,700 crore
IPO kicks off,” Economic Times,
September 15, 2017,

3 “Global
Insurance Industry Set To Grow More Strongly By 2018,” Munich Re, accessed
October 23, 2017,

4 “The New Deal: Driving Insurance
Transformation with Strategy-Aligned M&A,” KPMG, accessed October  24, 2017,

5 “Indian Insurance Industry
Overview & Market Development Analysis.” IBEF, accessed November 2, 2017, 

6 Tushar Dhara, “India’s Life
Insurance Sector Biggest in World, to Grow by 15 % Over Next 5 Years,” News 18,
January 17, 2017,

7 “Press Release,” HDFC Life,
accessed October 24, 2017,

8 Update on Scheme of Amalgamation, BSE Corporate Announcement,
November 2016,

9 Update, BSE Corporate Announcement, July

10 Subrata Panda, “HDFC, Standard
Life to sell 15 % stake in HDFC Life via IPO,” Business Standard , July 29, 2017,

11″HDFC Life
profit rises to 4.2 to Rs 818 cr in FY16,” Business Standard ,April 18, 2016,

12 “Max Life
Promoters,” Max Life Insurance,  accesses
November 3, 2017,

13 Ibid.

14 Remya Nair, “Max India to split
into three listed firms,” Livemint,
January 25, 2015, 

15 HDFC Life,
“HDFC Life, Max Group Entities finalizes merger of Life Insurance Business,”
press release, August 8, 2016,  

16 Ibid.

17 A Ramaiya, Guide to the Companies Act, 18th
ed., Vol. 2 (Gurugram: Lexis Nexis, 2015), 3844.

18 Shyamapada
Chakrabertty and Ors. v. The Controller of Insurance, 2 SCR Supl. 130 (1962).

19 “Insurance Newsletter,” Phoenix Legal,  May 2013, 

20 C.L. Tyagi and Madhu Tyagi, Insurance Law and Practice (New Delhi:
Atlantic Publishers, 2007), 387.

21 The IRDA
(Scheme of Amalgamation and Transfer of Life Insurance Business) Regulation,
2013, Stat. Regulation 3(2).

22 The Indian
Insurance Company (Foreign Investment) Rules, 2015, Stat. Rule 4.

23 Kania Shukla,
“Mega Merger on Insurance on Hold,” Lakshmisri,
 August 2, 2017,

24 “Max gives its ‘Life’ to HDFC,”
M Critique,  December 19, 2016,

25 Ibid.

26 Devidutta Tripathy, “HDFC Life
reaches a deal with Max Life to create $10 billion insurer,” Reuters, 
August 8, 2016,

27 “India’s largest private life
insurer in the making,” The Hindu
Business Line, June 17, 2016, 


29 “HDFC Life IPO mops up Rs 8,695
crore,” Economic Times, November 10,



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