IPO | SKS
SKS IPO Plans Spark Debate
SKS Microfinance, India’s largest MFI is planning to raise over Rs. 1000 crores ($225m) through the sale of 16.8m equity shares, as reported by the Economic Times. Per the IPO prospectus, Sequoia, Sandstone Capital and Kismet Capital Advisors replace SKS founder Vikram Akula as the chief promoters. This follows a RBI directive requiring a minimum 12% capital adequacy ratio (expected to become 15% in 2011) for non-banking financial institutions. A number of other MFIs, including Spandana, Share Microfin, Bandhan, BASIX and Equitas, are also believed to be making plans to go public based on the success of SKS’s IPO.
This news has sparked off a debate on whether a public company can prevent financial objectives from superseding the social objectives. Mohammad Yunus, founder of Grameen Bank and Nobel laureate, raised his concerns about this news in an interview with Microfinance Focus,
This is coming from the banking side, from the profit maximizing side and I am opposed to that. If they do it, I cannot stop them but I would encourage genuine Microcredit programs. The concern is that when you put an IPO, you are promising your investors that there is a lot of money to be made and this is a wrong message. Poor people should not be shown as an opportunity to make money out of. If you have a new kind of IPO where you can say that you can help people get out of poverty, it is a social business and if you invest here you never get any return from this then it is good.
Olivia Donnelly of Shivia Microfinance also raised concerns about increasing valuations and the lack of regulations in an interview with the Financial Express,
The job of microfinance is to alleviate poverty, so the question to ask is: who’s going to benefit from the IPO? MFIs are ignoring their social mission. They have a duty to educate their clients and not lend money for buying a TV or pay dowry just to add to their loan books. It’s the wrong path to take. It’s sub-prime all over again.
People on the other side of the debate point to the lack of other options for raising enough capital to match the rapid growth of microfinance in India and maintain the capital to risk ratio mandated by the RBI. According to Vijay Mahajan of BASIX, “For specific MFIs who have crossed a certain size an IPO becomes inevitable, because you can’t raise Rs 300-400 crore from private equity in one shot”. Samir Chaddha of Sequoia also believes that the IPO will increase visibility and trust for the MFIs and overall improve accountability.
This is a similar debate to the one spawned by the IPO of Compartamos back in 2008, which was covered in an op-ed by Prerna. While it is hard to predict the eventual impact of the SKS IPO, it does represent a coming of age for the microfinance industry in India and should significantly increase the number of people impacted by it.
Please post your views on this debate in the comments section.
4 Comments on “SKS IPO Plans Spark Debate”
I think the answer lies in an analysis of the returns the IPO promises investors. As long as there isn’t a windfall rise in returns, caused by a rise in interest rates (that are justified by high overheads), we should be OK with IPOs.
the debate is more complex than how you have presented it. level one, should sks go for an ipo? this is a question worth raising given that its top management has — in an act that defies description — cashed out pre ipo. look at professor ms sriram’s excellent paper on the commercialisation of the industry. that has details on the mystifying transaction between akula et al and treeline.
why would the top management of a company cash out a month before the filing of the draft red herring prospectus? what sort of signal does that send out about the company?
level two. this profit/social service questions. what is the impact of microfinance on poverty reduction? or, more specifically, what is the impact that these nbfc-mfis, the ones tapping private equity, etc, on the incidence of poverty in the geographies where they work? at this time, all we have are testimonies provided by the mfis themselves. and, yet, given that the women have to pay a 27% (to take a low number) interest every week for 50 consecutive weeks, while running their IGAs (income generating activities) in the villages which might still be dependent on agriculture and thus display seasonal ebbs and flows in money supply, it is a question worth asking.
talk to mf industry execs in andhra off the record and they say that poverty is still the same after ten years of mfi lending. is that true? i am waiting for the census to tell us more about this.
that is it. you may now go back to celebrating the coming of age of indian microfinance, as evidenced by the fact that sks is going for an ipo.
cheers
TEN REASONS WHY ONE SHOULD NOT INVEST IN SKS MICRO FINANCE IPO
1. Unethical business: The Company is charging interest around 40% p.a. on money lent to the poor and down trodden.
2. Unsustainable business model: The business model will not sustain in the long -run.
3. No commitment from the promoters: SKS’s founder and chairman sold his shares to Tree Line Asia Master Fund (Singapore) Pte for $12.9 million in Feb. this year.
4. Look at the salary of top executives :
Suresh Gurumani – Managing Director of the Company. The total monthly salary is Rs. 12, 50,000. In addition to the above, Mr. Suresh Gurumani was paid onetime bonus of Rs. 10,000,000, in April 2009.
Dr. Vikram Akula – chairman Rs 70.00 lacs p.a. In addition, ESOP amounting to Rs10.97lacs, totaling Rs 1.79cr p.a.
5. Mohd. Yunus says – “I get very worried when investment funds come to microfinance,” said the founder of Bangladesh’s Grameen Bank, which pioneered the industry by giving small loans to rural women to start their own businesses. “I don’t want to excite businessmen that there is profit to be made here,”
6. The IPO will make the promoters, and other venture capitalists including some P/E funds that have stakes in these companies’ millionaires. The hapless borrowers continue to live in abject poverty.
7. Government /RBI will not be mute spectators to the exploitation.
They are bound to regulate the segment. This will make the business un- attractive.
8. Financial inclusion initiatives taken by the public sector banks will marginalize the micro finance business. Do not buy the theories put forth by the BRLMs to sell the issue.
9. The average cost of acquisition of shares by promoters is less than Rs50/-The Company has limited period of history and no dividend payment record.
10. The Andhra Pradesh government has constituted district level ‘Task Force Committees’ (TFCs) to investigate the unethical practices of micro finance institutions in the state. The committees were constituted after the government received many complaints against the loan shark practices adopted by some leading MFI’s of the state.
Micro-Finance to Face Slow Painful Death. SKS Share to enter Free Fall. Sell, Sell, Sell!
SKS, the Indian micro-finance giant’s IPO was supposed to signal the coming of age of the micro-finance (MF). Instead, it contained the seed for the destruction of the entire industry. Their Rs 10 share on listing attracted a premium of Rs 975 and such was the investor confidence, it touched a high of Rs 1,490 in a matter of days. Then hell broke loose with the industry hit by charges of them profiteering and causing farmer suicides. Its reverberations were so strong that it had been felt by the industry all over the world. The stock plunged to Rs 890 before recovering to be a tad over its listing price and hovering around this range for the last one week. Technically and fundamentally, the share looks bearish and ready for a free fall. We expose the dark underbelly of a Frankenstein unleashed by NGOs.
Read more: http://devconsultgroup.blogspot.com/2010/11/micro-finance-to-face-slow-painful.html