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HDFC Ergo-HDFC GI merger could face a few questions in post-GAAR era

There is no doubt the deal is value positive for existing shareholders

Subhomoy Bhattacharjee  |  New Delhi 

Representative image. Illustration: Ajay Mohanty
Representative image. Illustration: Ajay Mohanty

Instead of merging General (formerly L&T General Insurance) with the larger entity Ergo, the promoters have gone the reverse way.

As the first of companies in the non-life space in India, the transaction was bound to create interest, which it did. The ‘reverse merger’ has not been noticed, though.

There is no doubt the deal is value positive for the existing shareholders. And, as and when the new entity is listed on the stock markets, it would hope that potential would believe the same.

The Regulatory and Development Authority of India (Irdai) confirmed that it had given the approval for the ‘reverse merger’. The deal, as it is structured, makes sense for the companies as it will be tax-efficient, a person close to the developments said. But, in the post-General Anti-Avoidance Rules (GAAR) era, some questions from the revenue authorities could emerge.

Last week, Ergo announced it had secured the approval of the National Company Law Tribunal (NCLT) and to complete the of General with itself. The became effective from August 16.

Interestingly, the word ‘reverse merger’ was not used, and for good reason. The deal will consolidate Ergo’s position as the third-largest private insurer in India with a market share of over 5.25 per cent, according to Irdai’s June 2017 data. In 2016, Ergo had bought out L&T General and rechristened it General The entity has till now operated as a wholly owned subsidiary of Ergo.

The issue is simple. authorities can justifiably ask if a is meant only to create shelter, to which the parties will have to demonstrate there is, instead, a larger public interest involved. kicked in from April 1 this year.

“It wasn't so before as the courts did not have the right to question this angle,” said a partner from one of the big four audit firms. An email sent to Ergo a few weeks ago remained unanswered.

Corporate governance expert Kaushik Dutta, however, said both from the shareholders’ point of view as well as larger potential investors, creating a tax-efficient structure was quite fine.

“As long as the shareholders (in this case parent company and German company Ergo) have more on the table, the deal works from the corporate governance perspective,” said Dutta, head of Delhi-based think tank Thought Arbitrage Research Institute that tracks corporate governance.

A media report has noted that the net worth of standalone entity Ergo was Rs 1,812 crore as on March 31, 2017. This is expected to drop to Rs 1,485 crore after the due to the accumulated of General This is where the advantage stemming from the reverse comes in useful.

Ergo has also been careful to ensure that amid all these developments the connect with the insured public is maintained. This could be the reason why the company has not made it up front that it is merging with its subsidiary to create a third new entity. While it is true that nothing palpable would have changed for the public, does run on a very thin sliver of confidence among those insured. No company will want to disturb this confidence. Thus, while the reverse makes sense financially, it is not a public accreting idea.

First Published: Wed, August 30 2017. 01:55 IST