Insurance

General insurers welcome merger norms

It was surely a timely move by the regulator, Insurance Regulatory and Development Authority (IRDA) to announce the merger and acquisition (M and A) norms for non-life insurance companies ten days ago. As the regulation is expected to facilitate consolidation in an industry annoyed by very low penetration of insurance – around 0.6 per cent, way below the levels of industrialized nations. Moreover, the industry has remained largely concentrated in the metros and large cities.

It was surely a timely move by the regulator, Insurance Regulatory and Development Authority (IRDA) to announce the merger and acquisition (M and A) norms for non-life insurance companies ten days ago. As the regulation is expected to facilitate consolidation in an industry annoyed by very low penetration of insurance – around 0.6 per cent, way below the levels of industrialized nations. Moreover, the industry has remained largely concentrated in the metros and large cities.

Financially too the general insurance industry is not doing well as the latest IRDA data shows that business is making losses for want of capital, mainly due to a cap on foreign equity infusion. In terms of premium underwritten, 13 private sector insurers accounted for Rs 13,977 crore in FY 2009-10 as against Rs 12,321 crore in 2008-09, a growth of 13 per cent.

Since policy holders are the main customers of an insurance company, in its merger policy, IRDA has given maximum importance to protect their interest. It has a specification that after the grant of in-principle approval of M&A scheme, the copies of the proposed merger should be kept open for inspection by the policyholders at the registered office besides uploading them on their respective web sites until the complete implementation of the scheme.

Low expectations

Welcoming the merger norms Bharti AXA Chief Executive Officer & MD Amarnath Ananthanarayanan says, “The regulation was necessary to ensure proper growth of the general insurance industry and to ensure consumers at large get the best in class service levels.” Concurs HDFC Ergo General Insurance’s Managing Director & CEO Rakesh Kumar saying: “IRDA releasing norms for M&A is quite timely. It is a welcome move and reduces nebulousness of the process.”

Needless to say insurance is the capital intensive business. “The way the industry is moving, there will be need for further capital infusion so consolidation is bound to happen,” adds Bharti AXA chief. Merger norms, however, may not lead to a deluge of M&As, feel industry insiders. Said the head of a private insurer based in Mumbai: two types of people will be interested in mergers, one, who wants to scale up business and another who wants to exit it. Of course, there is yet another kind like MukeshAmbani led Reliance Group, lavished with huge cash flow. A week ago the group announced buys out of the Bharti Enterprises’ 74 per cent stake in two insurance joint ventures with AXA, BhartiAxa Life Insurance Co and BhartiAxa General Insurance Co, at an estimated cost of Rs 3,000 crore.

“Insurance being a very capital intensive business, RIL can gainfully deploy its surplus cash in growing the business with AXA,” said S P Tulsian, an independent stock analyst in Mumbai. As RIL has a cash pile of Rs 42,000 crore, don’t be surprised if it pitches for another insurance firm in the future. Another takeover proposal awaiting clearance from IRDA is the Sundaram group selling its 74 per cent stake in Royal Sundaram Alliance Insurance Company, a joint venture of Sundaram Group and England-based RSA, to Anil Ambani-led Reliance Capital. Currently, there are 21 non-life insurance companies in India and most have maximum permissible foreign stake of 26 per cent from their joint venture partners.

IRDA says in case of a merger, the policy holders will continue to enjoy the same terms and conditions as they did under the existing policy, and they would be given an exit option. Besides, M&A proposal would have to give details of rationalization of the branch network, streamlining of products, taxation and valuation issues and projected revenue of the merged entity. Companies seeking merger will now have to submit a notice of intent one month prior to application along with a draft of the agreement for merger and transfer of business, balance-sheets of each of the insurers involved, financial condition report, report on the scheme by an independent actuary and a note on how policyholders’ interest would be protected.

They have to take the approval of the relevant high court before securing the final nod from the insurance regulator. In case of foreign partners in the JVs, approval from Foreign Investment Promotin Board (FIPB) and RBI is also mandatory.

Valuing the merger

The M&A guideline, however, is silent on valuations, except saying that IRDA would appoint an independent actuary if necessary. Ananthanarayanan of Bharti AXA views that the general insurance industry in India being nascent there are no precedents on valuation of companies or actual market values of these companies. “From that perspective it is better that specific guidelines for valuation are not mentioned at this point in time,” he said.

Yet, analysts and legal experts aver that non-disclosure of M&A value is against the interest of investors. The classic case is RIL’s recent buying of Bharti group’s majority stake in Bharti AXA insurance JVs, where the deal value was not disclosed though the stake acquisition was as high as 74 per cent. Said Geojit BNP Paribas Financial Services’ Gaurang Shah, “Shareholders have every right to know about the bits and pieces of a deal and they should not be kept in the dark.”

Legal experts say that the M&A regulations notified by IRDA is discriminatory and inconsistent with the Insurance Act. For instance, a processing fee ranged between Rs 50 lakh to Rs 5 crore is prescribed by IRDA , which is not there for Life insurance sector and so seen as discriminatory. “The fees charged should commensurate with the work involved and the value perceived,” says a chief executive of a private insurer asking what is the need for a fee when the merged entity would continue to pay annual licence fee?

In this context, HDFC Ergo’s Kumar says the guidelines is quite upfront about the processing fee to be remitted by both the companies, stating that it should be “one-tenth of one per cent of the total gross premium written in India by transacting entities during the financial year preceding the financial year in which the application is filed.” All that the Regulator did put a cap on the processing fee.

IRDA has also reserved the right to give the final nod on a merger even after a high court approval is obtained. In this context, a Supreme Court lawyer D Varadarajan, specialising in company and insurance laws, says, “This is a grey area in regard to the power of final nod as has been reserved by the regulations, even after the court’s approval.” The industry is also concerned that the guideline has not specified any timeline for approval saying only “as expeditiously as possible.” Critics also feel that despite good intentions, need for several approvals at different layers is quite elaborate and time consuming, especially the merger proposal required to be sent to all policy holders.

The M&A guidelines, however, will not solve many fundamental problems of the industry. As Ananthanarayanan points out that main challenges are the lack of right talents and inability to attract and retain talents.

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