PNB, Vijaya may exit Principal JVs

Contract skewed in favour of US major cited reason for parting ways.

Punjab National Bank (PNB) and Vijaya Bank have begun the process of exiting their joint ventures (JVs) with the US-based Principal Financial Group.

According to the agreement signed by the shareholders when forming the JV companies, the first right of refusal would be exercised by the shareholders if any partner decides to exit.

That means any partner who decides to exit should first offer his stake to the other shareholders in the JVs. If the current shareholders do not want to buy out, only then can the stake be offered to outside parties.

“We (PNB) are well protected. The agreements have several provisions to protect our interests. We have sent letters to all the shareholders, expressing our intent to exit the insurance broking, life insurance and financial planning company along with an offer to buy out our stake. We have not decided to exit from the asset management company,” said a PNB official, who did not want to be identified. Vijaya Bank officials declined to comment.

According to a banking source, since the joint venture companies are not listed, the two banks would not get the market value for their stakes, compelling them to sell at a discount.

“Whether the other shareholders will agree to buy or not or whether they will approve the new partners is too premature to talk,” said the PNB official.

An industry source said, “The entire contract is in favour of Principal and now the banks want to unwind it. Both the banks may end up selling their stakes to Principal Financial. However, after the banks exit, it will be a loss-making proposition to Principal as the customer base is from the banks.”

PNB and Vijaya Bank have three functional joint ventures with Principal Financial - Principal PNB Asset Management Company, PNB Principal Financial Planners and Principal PNB Insurance Advisory Company, an insurance broking firm.

The equity holding is similar in PNB Principal Financial Planners and Principal PNB Asset Management, where PNB owns 30 per cent stake, Principal 65 per cent stake and Vijaya Bank the remaining 5 per cent.

However, in the Principal PNB Insurance Advisory, PNB holds 30 per cent equity, with Principal holding 26 per cent, Berger Paints 25 per cent and Vijaya Bank 19 per cent.

In 2004, the plans of PNB, Vijaya Bank, Principal Financial and Berger Paints to form a life insurance company did not materialise as Principal Financial changed its plans and decided to offer pension products in India. This was in sync with their global strategy to concentrate on the pensions business.

Due to their differences, the shareholders did not revert to the Insurance Regulatory and Development Authority (Irda), which had raised queries while screening their “R1” (initial) application.

Principal Financial is the largest pension company across the world and is the seventh largest life insurer in the US.

The two banks had formed Principal PNB Insurance Advisory Company in 2005. According to insurance norms, a shareholder in an insurance broking company cannot earn profit as a corporate agent.

The issues became severe when Irda sent a letter last year barring the employees of the two banks from selling insurance policies to the banks’ customers as sub-brokers. In 2004, Irda had raised objections to PNB and Vijaya Bank acting as corporate agents for National Insurance Company.

A few months ago, Vijaya Bank Chairman Prakash P Mallya had announced his intention of exiting all the JVs and also the proposed life insurance venture, as the stakes did not or would not make any significant additions to its revenues.