Markets

Andy Mukherjee is a Bloomberg Gadfly columnist covering industrial companies and financial services. He previously was a columnist for Reuters Breakingviews. He has also worked for the Straits Times, ET NOW and Bloomberg News.

The IPO market is thriving, mid- and small-cap stocks are at record highs, corporate bond yields are sliding, and government officials are banging the tables for a sovereign-rating upgrade. All the ingredients are in place for large shareholders in Indian companies -- or "promoters" as they're known -- to display their most egregious behavior.

Optimism All Round
Small- and mid-cap stocks in India have been rising, with bonds, whose yields have been sliding
Source: Bloomberg

The most recent example involves a clever merger and spinoff through which India will soon get its second-largest insurer. Max Life Insurance, 26 percent-owned by Mitsui Sumitomo Insurance,  will first be subsumed into its parent Max Financial Services, which is backed by KKR and Goldman Sachs and is publicly traded. 

Next, the insurance unit will be spun off and unlisted HDFC Standard Life will merge with it. A little more than two-fifths of the combined entity will be controlled by Housing Development Finance Corp., thus giving India's largest mortgage lender the opportunity to simultaneously expand its market share in the life insurance business and get it listed.

So far so good. But Analjit Singh, the promoter of Max Financial, will get an 8.5 billion rupee ($127 million) noncompete fee from the merged entity, despite owning a 6.5 percent stake in it.

Greed Is Stronger Than Justice
The listed company at the center of a merger to create India's second-biggest insurer has rallied

The idea that other investors should pay a shareholder noncompete fees when he isn't even exiting the business is wrong, and brazenly so.

After all, Singh being reduced to an insignificant investor isn't the equivalent of, say, Elon Musk being diluted to the point where he feels bored enough to walk away from Tesla and compete against it.

Who cares if Singh started India's 25th life insurance company? As many as 14 of the existing two dozen players control less than 1 percent of the market each, while Life Insurance Corp. of India -- the former state-owned monopoly -- still collects 70 percent of all premiums. With a 6.75 percent share, the bulked-up HDFC Standard Life would have nothing to worry about if Singh did decide to start a rival. He would be crazy to want to.

Besides, it isn't just Singh and his family who are being compensated. Even his private investment vehicles, such as Mohair Investment & Trading, will collect a part of the $127 million, leaving little doubt about the true nature of this side payment. Had this been a regular takeover of the business by HDFC Standard Life, the stock-market regulator would have said no to the sham noncompete. But since the deal has been designed as a merger, it's up to the other shareholders to try to block the payout.

That might be asking too much. According to local media reports, KKR and Goldman Sachs won't demur. Even mutual-fund managers, who are being advised by their association to oppose the fee, can lament it. But when it comes to voting, they'll probably chicken out. The benefits of seeing the transaction through far outweigh the cost of letting the deal flounder if Singh refuses to budge.

That doesn't mean minority investors won't begrudge the injustice. But there's a history of unfairness from Indian promoters. Just last month, billionaire Kumar Mangalam Birla served up a complicated merger and demerger arrangement within his group that gives him privileges far in excess of what he's paid for.

This is probably just the beginning. The better India's markets perform, the worse one can expect promoters to behave. In a climate of all-round greed, small shareholders don't mind being shortchanged -- or not as much as when they're not making money. Mistreatment of minorities could become an epidemic.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

  1. The stake was earlier held by New York Life International.

  2. The Economic Times reported this week that Goldman has put its stake in Max Financial up for sale.

To contact the author of this story:
Andy Mukherjee in Singapore at amukherjee@bloomberg.net

To contact the editor responsible for this story:
Paul Sillitoe at psillitoe@bloomberg.net