Proxy advisory IiAS has recommended to public shareholders of Max Financial Services to vote against the proposal to pay ₹850 crore to the company’s promoters in non-compete fees.

In August, HDFC and Max Life agreed to merge their life insurance businesses to create the country’s largest listed life insurance company in an all-stock deal. As part of this deal, Max’s promoters would sign a non-compete and non-solicitation agreement for four years for a fee of ₹850 crore, which includes an upfront payment of ₹500 crore immediately post-merger and the remaining ₹359 crore in three annual equal instalments. The entire amount will be paid by the merged entity (HDFC Life and Max Life).

The non-compete agreement will apply to Max Life in the Indian and UAE markets and the promoters cannot make/hold investments in competitors or hold advisory posts at any competitor or provide funding to any competitor. In its Wednesday report, Institutional Investor Advisory Services (IiAS) argued against the payment of such a fee to Max’s promoters.

Inherent deterrent

“After the merger, the promoters of Max Financial will continue to hold a 6.5 per cent stake in the merged entity.

“The large stake by itself should act as a deterrent for Max Financial’s promoters from starting a competing business in the life insurance industry,” the report said.

“Additionally, the non-compete fee is being paid by the merged entity, which implies that Max Financial’s minority shareholders (who will receive HDFC Standard Life’s shares) will bear part of the expenses.”

“As non-compete fees,” the report found, “the promoters receive over ₹100 a share in addition to the shares of the combined entity — which is a 21 per cent premium over the returns for non-promoter shareholders.”

The results of the vote will be announced on September 27.

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