MAX INDIA TAKES CONTROL IN LIFE INSURANCE JOINT VENTURE

New Delhi: Contrary to the popular trend of Indian companies diluting their economic interests in joint ventures, Max India has probably become the first domestic company to do the opposite. It has raised its economic interest in its life insurance joint venture company, Max New York Life (MNYL), from 50% to 74%. MNYL is a joint venture between Max India and US-based New York Life.

This means Max India’s share in the valuation of MNYL has gone up by 24%. A recent research report by an Indian broking house has pegged the value of MNYL at over Rs 10,000 crore based on 2009-10 premium estimates. MNYL accounts for about 80% of Max India’s consolidated revenues.

As per the options agreement signed between the partners in 2003, for every equity investment made in the 26:74 joint venture, New York Life used to contribute 26%, Max used to pump in 50%, and the Indian company’s remaining 24% used to be funded through an advance paid to it by New York Life.

It had also been agreed that when the 26% FDI sectoral cap in the insurance sector was relaxed, New York Life would have the option of increasing its shareholding in the joint venture to up to 50% at par value. These provisions had been approved by the Insurance Regulatory and Development Authority (IRDA), and were disclosed in Max India’s successive annual reports.

However, under the fresh joint venture agreement, Max has repaid the Rs 174-crore deposit paid by New York Life and increased its economic interest to 74%. The US partner will now have to buy the additional 24% shareholding at 90% of fair market value. NYL will get a 10% discount for being a promoter-shareholder when the transaction happens. This option will be valid till 2016.

“The restructuring of the joint venture will significantly enhance value for Max India shareholders here and now. Max India and New York Life have also signed on an aggressive expansion plan, which entails a peak capital investment of Rs 3,600 crore, of which Rs 1,300 crore has already been invested,” Max India chairman Analjit Singh told ET.

By raising its economic interest to 74%, Max India has also ensured that the joint venture does not become a subject of controversy in the future. The economic interest issue has been a thorny one for both the investors and the government. In sectors like insurance and telecom, where there are FDI sectoral caps, it has been a common practice for the joint venture partners to agree to a pre-determined price at which the foreign partner will hike its stake as and when the sectoral cap is raised.

This pre-determined price is almost always less than the fair market value at the date on which the share transfer actually takes place. In such instances, the foreign partner also often advances interest-free funds to the domestic partner as part of its equity contribution in the joint venture.

While there is nothing illegal in this practice, the lack of proper dislcosures by some domestic listed entities has resulted in investors overestimating the upside of these joint ventures. Morever, the government is unsure about whether varying economic interests amount to a violation of FDI sectoral caps. This issue became a flashpoint last year, when Vodafone bought Hutchison Essar, though the transaction was eventually cleared by the government.

Source: Javed Sayed
The Economic Times