In cases where one bank promotes two insurers in same category post merger, the companies will either have to be merged or sold
Finance Minister Nirmala Sitharaman on August 30 unveiled a mega merger plan for public sector banks (PSBs), amalgamating 10 banks into four. While the initiative is aimed at having fewer but stronger banks, this will impact the insurance joint ventures of the merger candidates.
Also, there may be some uncertainty for policyholders. Will their policy hold if the insurance provider is a part of a bank that is getting merged with another?
As per rules of the Insurance Regulatory and Development Authority of India (IRDAI), an entity or institution can promote only one insurance company in the life or non-life sector. Once the banks merge, some will have two life insurers within the group which is not permissible.
The Oriental Bank of Commerce, along with United Bank, will be merged with Punjab National Bank. This raises questions on the future of OBC’s insurance entity Canara HSBC OBC Life Insurance. This is because PNB already has PNB MetLife Insurance and will not be allowed to hold stake in another life insurer.
Similarly, Andhra Bank (and Corporation Bank) will get merged into Union Bank of India. Union Bank has Star Union Dai-ichi Life Insurance while Andhra Bank has stake in IndiaFirst Life Insurance. Whereas Andhra Bank has planned to sell its stake in its insurance joint venture, the process has not yet been completed.
The consolidation will bring down the total number of public sector banks in the country to 12 from 27 in 2017. At the same time, this would also lead to a consolidation among insurance companies.
“It is clear that two life insurers will not be allowed to operate under one promoter. While an exception has been made for IDBI Federal Life which is owned by LIC-owned IDBI Bank, such relaxation will not be given for other entities,” said a senior official.
On the other hand, Canara Bank and Syndicate Bank are set to merge. Similarly, Allahabad Bank (JV partner in Universal Sompo) and Indian Bank will merge. However, these will not have any impact on the insurance JVs because the other party does not have any insurance venture.
Possible scenarios for customers
Policyholders may not have to worry. The regulator will ensure that, even if two entities merge, the policies remain intact. For instance, even if two life insurers were to be merged post bank consolidation, the features of the policies sold in the past would remain the same.
However, in case any of the banks is keen to sell off the stake and unable to find buyers, a period of uncertainty will follow. As per IRDAI rules, no joint venture partner can exit an insurance venture without finding an alternate buyer. But, since these are merger candidates, there is no clarity on the immediate steps that IRDAI will take.
“Players like Andhra Bank and Allahabad Bank have already expressed intent to exit/part sell their stake in the insurance business. Even if they are unable to find buyers, if the bank is merged, the legal status of the insurance venture will have to be immediately looked into,” said a Mumbai-based consultant looking at insurance M&A.
What can banks do?
If the existing shareholders are willing to buy out the outgoing bank’s stake, things will become easier. However, the foreign investment limit is also capped at 49 percent and, hence, stake purchase by the global shareholders is ruled out.
Another option for the banks is to immediately look for buyers. Consultants have said that several private equity firms are in the lookout to enter the insurance business. However, considering that the to-be-merged could be similar to a “distress” sale, the valuations offered may not be very attractive.
Since all the insurance companies have agreements between multiple joint venture partners, a majority of whom entered the business because of the presence of one another. If one bank exits, other shareholders may also decide to exit.
It is likely that a transition period will be provided, considering that several insurance ventures are concerned.
Meanwhile, the bancassurance agreements will also have to be re-visited. Each bank is allowed to sell three life, three non-life and three standalone health insurers’ products.Once the merger is implemented, the past bancassurance (sale of insurance through banks) will not be valid and will have to be drafted afresh.Get access to India's fastest growing financial subscriptions service Moneycontrol Pro for as little as Rs 599 for first year. Use the code "GETPRO". Moneycontrol Pro offers you all the information you need for wealth creation including actionable investment ideas, independent research and insights & analysis For more information, check out the Moneycontrol website or mobile app.