Talk to our Experts
1800-12000-0055
Get a call back!! 
With the insurance regulator rejecting the HDFC Life and Max Life merger structure, mortgage major HDFC is looking at selling 10% of its stake in its life insurance arm through an initial public offering (IPO).
"We are examining the options available before us. One option is to go in for an IPO, work on which had already begun before the merger proposal came up. If we decide on an IPO, the process should be wrapped up within six months," said Amitabh Chaudhry, MD & CEO, HDFC Life. Meanwhile, both the insurance companies are likely to extend their standstill agreement even as they look for a merger structure agreeable to the regulator without major tax implications.
What is supporting an IPO decision is the positive market sentiment in respect of insurance. The only listed insurer ICICI Prudential, which had a couple of months earlier fallen below issue price, is now trading at a premium. The private insurer, which reported an embedded value (EV) of Rs 16,184 crore, has a market value of Rs 63,000 crore a multiple of four. If the same multiple were to be applied to HDFC Life's EV of Rs 12,300 crore, its market value would be close to Rs 50,000 crore. EV is a measure of valuing a life insurance company. Conventional valuation does not work as insurers spend money to acquire customers in the first year but revenues are generated over the years.
"As far as the merger proposal is concerned, we are at a standstill, which means that neither of us will look at another partner. We will continue to engage with one another to work out a solution," said Chaudhry.
An equity dilution would still leave HDFC with controlling stake since its foreign partner Standard Life holds only 35% as against the maximum permissible 49%. The lower foreign stake also gives enough headroom for foreign investors to subscribe.
Earlier this month, the IRDAI said that the proposed merger of Max Life and HDFC Life violates Section 35 of the Insurance Act, 1938, which does not allow merger of an insurance company with a non-insurance firm.
The proposed merger involved Max Life, for a brief while merging with Max Financial Services. The insurance companies had obtained an opinion that the merger was possible since almost immediately after the merger, the merged entity would divest its non-insurance business.
