IT solutions company Mastek is set to demerge its insurance business into a new company — Majesco — that would focus on software products.

Mastek shareholders would get one equity share of Majesco for every equity share held in Mastek. The new company would be eventually listed on the Bombay Stock Exchange and the National Stock Exchange.

Mastek, which is known as MajescoMastek in the US, would retain the existing solutions businesses in the domains of financial services, government and healthcare.

“The key rationale behind this move is for each part of the business to flower, grow and capitalise on the market opportunities,” Sudhakar Ram, Managing Director and Group CEO of Mastek, said at a news conference.

Majesco starts with annual revenue of ₹507 crore as on March 31, 2014. In a note to investors, Mastek said the transaction provides ‘an opportunity for the shareholders to participate in business of their choice based on their risk-reward profile.’ The insurance business, which calls for higher investment in product development, has been dragging the overall margin profile of Mastek.

While Mastek Ltd had an EBITDA margin of 14.4 per cent, its insurance business recorded EBITDA margin of 5.9 per cent as on March 31, the company said.

Once the demerger is through, Mastek’s business model would be comparable to that of other Indian IT service companies, said Ram.

New directors Majesco would also have a new board of directors. Ketan Mehta, Director of Mastek would be Chief Executive Officer of Majesco, while Sudhakar Ram would continue to run the show at Mastek.

“The US insurance industry is in the midst of a once-in-a-generation modernisation cycle, providing an excellent opportunity for Majesco to gain a large share in the growing market. This restructuring will enable creation of a strong platform to pursue (the) next stage of growth,” Mehta said in a press statement. Insurance companies spend between 3-5 per cent of their revenue on information technology, added Mehta.

The proposed scheme of arrangement would be subject to the approval of the High Court of Bombay and the High Court of Gujarat, Mastek said. The company hopes to have Majesco shares listed by June 2015.

Shares of Mastek were up by 16.1 per cent to close at ₹272.25 on the BSE today.

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