FAILURE OF MERGERS IN INSURANCE SECTOR: A STUDY OFHDFC LIFE-MAX LIFE DEAL FAILURE.  ABSTRACTThe Indian insurance sector has shown a remarkablegrowth after year 2000, when entry of private domestic and foreign companies inthe Indian insurance sector was allowed. The removal of entry barriers alsopromoted many foreign companies to invest in the insurance sectors.

However,despite such rapid growth the sector has failed to witness many successfulmergers and most of the insurers are opting of IPOs. One example of failedmerger is that of HDFC Life –Max Life merger deal which was once termed abiggest merger in insurance sector. The main reason for the failed was theIRDAI’s rejection of the merger scheme because of its non-compliance withsection 35 of the Insurance Act, 1938. The essay seeks to understand theconcept of merger failure in life insurance sector with special reference tothe failure of HDFC Life-Max Life merger deal. It also provides a detailedanalysis of the trends in global insurance sector as well as Indian insurancesector.  The essay explains the proposedHDFC Life –Max Life merger deal and enquires into the various reasons offailure of this deal.

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It also explains the legal provisions governing themergers in insurance sector along with the application of these provisions onthe said deal. The essay also seeks to understand why most of the insurers areundertaking IPOs and not undergoing the process of mergers.Keywords: Insurance sector, mergers,HDFC Life, Max Life, Initial Public Offer (IPOs).           I.                  INTRODUCTIONMerger is one ofthe preferred modes of corporate restructuring followed by corporate entitiestoday. It refers to a combination of two or more companies in which the assetsand liabilities of the selling firm (s) are absorbed by the buying firm.1   Theremay be different reasons for undertaking mergers such as competitive advantage,increasing profit, cutting cost, etc.

However, it is not necessary that allmergers and merger deals end up being successful, the possibility exists that amerger may fail due to a lack of strategic planning, improper execution, illegality,disapproval by regulatory authorities, etc. One key example in recent times is theHDFC Life – Max Life merger deal failure which was touted as the biggest mergerin life insurance sector. Failure of this merger is reflective of the recenttrend of insurers opting for initial public offerings (IPOs) – such as ICICILombard opted for IPO raised an amount of Rs 5700.94 crore.2II.               OVERVIEW OF THE INSURANCESECTORInsurance sectoris one of the major sectors in economies of various countries and plays acrucial role in strengthening the economy of the country.

The global insurancesector is expected to grow by 4.5 % p.a. on in 2017 and 2018.3 Thenumber of mergers and acquisition in insurance sector are expected to increase in2017 and some 84 % of insurers plan to target 1-3 acquisitions in 2017 plus atleast one divestiture is expected by 94 % of the insurers.4 However,the trends are quite different in India where the insurance companies are goingfor IPO rather than unsuccessful mergers.

The Indian insurance industry consistsof 58 insurance companies out of which 24 are in life insurance business and 33are non-life insurers and one re-insurer.5 India’s lifeinsurance sector is the biggest in the world and recorded a growth rate of 22.5% in FY 2015-16.6 However, most of the lifeinsurers are going for IPO after the relaxation of capital raising norms by theInsurance Regulatory and Development Authority of India (IRDAI).

In 2017,insurers like ICICI Lombard, SBI Life, GIC, Reliance Nippon Life, New India andHDFC Life have raised huge amounts through IPOs.III.            BACKGROUND OF THEFAILED DEALHDFC in a pressrelease in June, 2016 announced to enter into an exclusive agreement with MaxLife and Max Financial Services Limited (MFSL) to evaluate the strategiccombination.7 This was seen as a shiftfrom HDFC Life’s earlier decision of getting listed by undertaking an IPO. In August2016, the board of directors of each of the companies involved approved thescheme and sent the details of the deal to three key regulators of mergers ininsurance sector namely the Securities and Exchange Board of India (SEBI), theCompetition Commission of India (CCI) and the Insurance Regulatory andDevelopment Authority of India (IRDAI). In the meantime, the consent ofshareholders of the companies was obtained and the scheme was approved bymajority shareholders of MFSL and Max India. A joint application of thecombination was also filed with the competition regulator CCI for its approval.In November, 2016 a disclosure regarding the merger scheme was made to theBombay Stock Exchange (BSE) in which the IRDAI had reservations regarding the schemeand it refused to accept the scheme8 asit was against the mandatory provisions of the insurance laws of the country.

Since the proposed deal involved complicated combinations, the IRDAI requestedthe 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 thedeal. After the rejection, the companies tried to design an alternative schemeof merger, however, they failed to do so and the merger completely failed when MFSLdisclosed to BSE that the agreement is ‘not being extended.’9IV.            PARTIES  INVOLVED IN THE DEAL HDFC Standard Life Insurance Company Limited (HDFCLife)HDFC Life is ajoint venture between HDFC and Standard Life Aberdeen plc, which is a foreign investmentCompany. At the time of the proposed scheme, HDFC had 61.

5 % stake in the jointventure while Standard life had stake of 35% in the same.10It is one of the leading life insurer in the private sector which recorded a4.2 % rise in the net profit at Rs 818 crore for Fiscal year ended in 2016.11MaxLife Insurance Company Limited (Max Life)Max Life is anunlisted private company which was originally established under the name MaxNew York Life Insurance Co. Ltd. which is a joint venture between Max FinancialServices Ltd.

(MFSL) and Mitsui Sumitomo Insurance Co. Ltd.12 InNovember 2017, MFSL had a stake of 72.1 % in the joint-venture while remaining stakewas owned by Mitsui.

13 Max Financial Services Limited (MFSL)MFSL is a listedIndian investment company under Max Group and owns a majority stake in Max Lifewhich makes it India’s first listed company which entirely focuses on lifeinsurance sector.Max India Limited (Max India)Max India is multi-businesscorporate which was divided into three units – life insurance unit, health andallied business and manufacturing unit.14The original name of the company was Taurus Ventures Limited. Max India alsoholds three listed companies namely Max Healthcare, Max Bupa Health Insuranceand Antara Senior Living.

EXPLANATION OF THE DEALThe proposedmerger between HDFC Life and Max Life involved a three-step process which areas follows:(i)                Merger of Max Lifewith Max Financial Service LimitedThe first stepinvolved the merger of Max Life into its holding company MFSL. According thescheme, shareholders of Max Life would have received one share of MFSL forapproximately five shares of Max Life.15 Thismerger would have resulted in transfer of entire business including assets andliabilities to MFSL.(ii)              Demerger of LifeInsurance undertaking of Max Financial Service Limited into HDFC Life After thecompletion of step 1, the resultant merged entity would have demerged itslife-insurance undertaking into HDFC Life. Further, the shareholders of MFSLwould have received 2.33 shares of HDFC Life in return of each share of MFSL.16(iii)            Merger ofremaining business of Max Financial Service Limited with Max India.

The third andfinal step was of the merger of MFSL, which would have held the remainingnon-life insurance business after demerger, with Max India which is a listedcompany. The shareholders of MFSL would have received 1 share of Max India inreturn of every 500 shares of MFSL. Completion of this step would have resultedin creation of a listed merged entity. V.               LEGAL PROVISIONS GOVERNINGTHE DEAL §  Provisions of the Companies Act, 2013.

Section 230 to 234of the Companies Act, 2013 are the essential provisions which govern mergers inIndia. 230(5) makes it mandatory for the company to send a notice regarding thescheme to authorities such as SEBI, CCI, income tax authorities, stockexchanges and the regulators (IRDAI in the present case). Section 231 dealswith the power of National Company Law Tribunal (NCLT) to regulate theimplementation of merger scheme while section 232 the procedure and rules ofmergers and amalgamation of companies. The power to sanction a compromise orarrangement a listed company and an unlisted company is vested with theTribunal and unlisted company will remain unlisted till the time it becomes alisted company.

17 These provisions wherenot notified when the proposed scheme was submitted to the Court underCompanies Act, 1956. However, after notification of these section an alternativescheme was submitted to the Tribunal. §  Provisions under Insurance Laws. Section 35 of theInsurance Act, 1938 provides that the transfer of or amalgamation of one lifeinsurer with any other life insurer can only be made in accordance with ascheme prepared under the section and the scheme must be sanctioned by theAuthority.

18 Sub-section (2) makes innecessary for the parties to provide the agreement of the transfer in thescheme itself. A ‘notice of intention’ of making such application must be sentto the Authority along with certified copy of the documents at least two monthsbefore filing such application. The IRDA (Scheme of Amalgamation and Transferof Life Insurance Business) Regulation, 2013 prescribe a two-stage process involvinga pre-transaction in principle approval stage and a final approval to giveeffect to amalgamation or the transfer after all regulatory and statutoryapprovals have been obtained.19Afterthe in principle approval by IRDAI, it is necessary to obtain approval of NCLT,Reserve Bank of India (RBI),  ForeignInvestments and Promotion Board (FIPB), SEBI and CCI. However at the stage offinal approval, the IRDAI has final power to decide and regulate the merger andamalgamation of insurance companies.20The Regulations also provide that IRDAI may disapprove the scheme of merger onthe grounds of non-compliance with the applicable laws, lower solvency marginof the merged entity, if the scheme is adverse to the best interest of thepolicy holder and if the scheme is hampers the orderly growth of the sector.

21§  Provisions under Foreign Investment NormsThe FDI Policy2016 (which was prevalent at the time of deal) and Rule 6 of the IndianInsurance Company (Foreign Investment) Rules, 2015 provides an upper limit of49 % in case of foreign investment in an Indian insurance company. Under theForeign Investment Rules, an Indian insurance company is under an obligation toensure that company is under Indian ownership and Indian control as provided inclause (k) and (l) of rule 2.22Thus,in order to insure ‘Indian ownership’ and ‘Indian control’ of an insurancecompany it is necessary that 50% of the equity capital is owned by a residentIndian citizen or an Indian company which also controls the company. §  Provisions under SEBI Regulations. A company has tofollow certain regulations of SEBI including SEBI (Issue of Capital andDisclosure Requirements) Regulations, 2009 to get listed on a stock exchange bypublic issue. Also, under Regulation 10 (1) (d) of SEBI (Substantial Acquisitionof Shares and Takeovers) Regulations, 2011 an exemption is provided to mergerwhich in pursuant to order of Tribunal or any competent authority and thecompanies are not obliged to make an open offer for takeover.

Since theTakeover Regulations are not applicable to the schemes of mergers, there is norestriction on payment of non-compete fees to the promoters.§  Provisions under the Competition LawSection 5 and 6 ofthe Competition Act, 2002 provides the merger control scheme under competitionlaw. Section 5 explains the concept of combinations which includes acquisition,merger and amalgamation of enterprises. Section 6 provides for regulation ofsuch combination which adversely affects in the relevant market and explicitlystates that such combination would be void.

Apart from the provisions of theCompetition Act, the CCI (Procedure in regard to transaction of businessrelating to combination) Regulations, 2011 also govern the combinations andprovides for the procedure for approval of such combination. VI.            LEGAL ISSUES ANDREASONS FOR FAILUREThe main issue andthe ground of rejection of the deal was non-compliance with section 35 of theInsurance Act, 1938. The section permits merger of one insurer only withinsurance business of another insurer. Insurer, under the said Act, means anycompany whose sole purpose is to run a business of life insurance or generalinsurance or re-insurance.

The IRDAI while considering the merger scheme,applied strict rule of interpretation in order to interpret section 35 anddefinition of insurer and rejected the scheme. The first step of the schemeinvolved merger insurer Max Life with MFSL which is not solely engaged ininsurance business. This highlights the lacuna in the law as section 6A of thesame act allows the insurer to transfer the shares to any person includinganother insurer if the paid up holding of Transferee Company does not exceeds 5% of paid up capital. Also, absence of any judgement or precedents oninterpretation of the section adds to the legal conundrum. Thus, the law itselfis ambiguous as shares of an insurer can be transferred to any person undersection 6A but the merger of an insurer can only be with an insurance companyunder section 35.However, theparties involved in the scheme relied on the composite scheme of arrangementprovided under the Companies Act, 2013 and advocated the legal validity of thescheme.

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 singleorder of the Tribunal and regulatory authorities, any stage of the schemeshould not be looked in insolation as all steps of the amalgamation processneed to be necessarily completed for the implementation of the merger.23It was unjustified on the part of IRDAI to isolate the stage and consider itslegal validity rather than considering the scheme as a whole.Another importantlegal issue surrounding the scheme was of violation of foreign investmentnorms. The maximum permissible limit of foreign investment in insurance sectoris 49 % and the IRDA (Registration of Companies) Regulations, 2000 explains themanner of calculation of total foreign investment in an insurance company.According to the Regulations, the foreign investment must be calculated on thebasis of the shares held by foreign investor directly or indirectly in theinsurance company and Indian promoter. Thus, the shareholding of the foreigninvestor i.

e. Standard life must be considered.  After the competition of the scheme, theStandard Life would have held a share of 24.1 %24which is much below the threshold limit of 49 %.  Though the foreign investment in the mergedentity would have been less than the threshold limit but the merged entitywould have violated rule 4 of the Insurance Company (Foreign Investment Rules),2015 as the scheme did not provide for ownership and control of merged entityby 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.25The schemeprovided for a payment of high non-compete fees to promoters of the MFSL whichcould adversely affect the interest of minority shareholder. However, thepayment 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).

VII.         IMPLICATIONS OFTHE FAILURE OF MERGER DEALThe completion ofthis merger deal would have resulted in creation of the biggest insurancecompany in private sector with an estimated value of 10 billion USD.26Success of this merger would have benefited both HDFC Life and Max Life byreducing the operational costs and increasing the market penetration. Themerged entity was expected to attain a market share of 12.4 % of the totalprivate life insurance sector27along with increased customer base. The merger of giants like HDFC Life and Maxlife would have given an additional infrastructural advantage to the mergedentity along with combined resources.

The failure ofthis merger deal forced HDFC Life to undertake IPO and get listed rather thangetting listed by the process of reverse listing. The failure of the mergerdeal has adversely affected the life insurance sector as the merger of HDFCLife and Max Life would have created a  merged entity withnet premiums of Rs 25, 529 and solvency of around 252 %,28which could havepromoted a healthy competition and stability in insurance sector.        VIII.

       CONCLUSION In November 2017,after the failure of Insurance sector’s biggest merger, HDFC Life raised anamount of Rs. 8,695 crore by undertaking an IPO.29In the same year, insurers like ICICI Lombard, SBI Life, General InsuranceCorporation, Reliance Nippion have raised huge amounts by undertaking the processof IPO. The increase in number of IPOs by insurers highlights the fact thatinsurers are now preferring to undertake IPOs rather than the complex process ofmerger in order to strengthen their market position. One of the primary reasonsfor an upsurge in number of IPOs by insurance companies is lacuna in theregulatory laws governing the merger schemes.

Lack of clarity on theinterpretation of section 35 and 6 of the Insurance Act and the excessive powervested in IRDAI has forced the insurers to avoid the process of mergers. On theother hand, IPO is now seen as the best alternative available to the insurersto improve their market position by generating huge capital. Thus, in order topromote mergers and acquisitions in insurance sector there is a need to issueguidelines in order to bring clarity in the governing laws. Also, it isnecessary that there must be a check on the exercise of power by IRDAI andcertain exemptions must be granted in order to remove barriers for the processof 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 croreIPO kicks off,” Economic Times,September 15, 2017,https://economictimes.indiatimes.

com/markets/stocks/news/icici-lombards-rs-5700-crore-ipo-kicks-off-heres-what-10-brokers-have-to-say-on-issue/articleshow/60523793.cms.3 “GlobalInsurance Industry Set To Grow More Strongly By 2018,” Munich Re, accessedOctober 23, 2017, “The New Deal: Driving InsuranceTransformation with Strategy-Aligned M&A,” KPMG, accessed October  24, 2017,

com/content/dam/kpmg/xx/pdf/2017/03/the-new-deal.pdf.5 “Indian Insurance IndustryOverview & Market Development Analysis.” IBEF, accessed November 2, 2017, https://www.ibef.

org/industry/insurance-sector-india.aspx.  6 Tushar Dhara, “India’s LifeInsurance Sector Biggest in World, to Grow by 15 % Over Next 5 Years,” News 18,January 17, 2017,

html.7 “Press Release,” HDFC Life,accessed October 24, 2017,https://www.hdfclife.

com/iwov-resources/pdf/media/press/2016/HDFC-Life-Max-Life-and-Max-Financial-Services-Announces-Entering-into-Exclusivity-to-Evaluate-a-Strategic-Combination.pdf.8 Update on Scheme of Amalgamation, BSE Corporate Announcement,November 2016, Update, BSE Corporate Announcement, July2017,http://www.bseindia.

com/xml-data/corpfiling/AttachHis/fec26046-47a9-4205-99f2-1f1ceda11564.PDF.10 Subrata Panda, “HDFC, StandardLife to sell 15 % stake in HDFC Life via IPO,” Business Standard , July 29, 2017,

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

12 “Max LifePromoters,” Max Life Insurance,  accessesNovember 3, 2017,

aspx.13 Ibid. 14 Remya Nair, “Max India to splitinto 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,https://www.hdfclife.

com/iwov-resources/pdf/media/press/2016/Press_Release_Merger_Board_Approval.pdf.   16 Ibid.17 A Ramaiya, Guide to the Companies Act, 18thed., Vol. 2 (Gurugram: Lexis Nexis, 2015), 3844.

18 ShyamapadaChakrabertty 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 IndianInsurance Company (Foreign Investment) Rules, 2015, Stat. Rule 4.

23 Kania Shukla,”Mega Merger on Insurance on Hold,” Lakshmisri, August 2, 2017, “Max gives its ‘Life’ to HDFC,”M Critique,  December 19, 2016, https://mnacritique. Ibid. 26 Devidutta Tripathy, “HDFC Lifereaches a deal with Max Life to create $10 billion insurer,” Reuters, August 8, 2016,https://in. “India’s largest private lifeinsurer in the making,” The HinduBusiness Line, June 17, 2016,

  28 29 “HDFC Life IPO mops up Rs 8,695crore,” Economic Times, November 10,2017, 


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