Billionaires behaving badly as Indian markets take off

By Andy Mukherjee

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.

The big winners

'Promoters'
The most recent example involves a clever merger and spinoff through which India will soon get its second-largest insurer. Max Life Insurance, 26 per cent-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 Rs 850 crore ($127 million) noncompete fee from the merged entity, despite owning a 6.5 per cent stake in it.

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 per cent 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 non compete. But since the deal has been designed as a merger, it's up to the other shareholders to try to block the payout.