13 Comments

1. July 21st, 2010 at 11:35 pm, Tweets that mention What should we look for with the SKS IPO? -- Topsy.com ()

   [...] This post was mentioned on Twitter by CGAP, Michael Anthony. Michael Anthony said: CGAP on the SKS IPO: http://shar.es/mPbq6 [...]

2. July 23rd, 2010 at 6:09 am, Dr S Santhanam ()

   SKS is doing a great work for improving the economic lot of the poor. It was reported earlier in the blog by Sriram how the promotors of the company have misused their position and appropriated themselves huge funds by way of ESOPs and selling the shares at a huge premium, bringing in people like Narayana Murthy of Infosys on the Board etc. I am afraid if the company is also gripped with the sense of greed but camouflaging it under the garp of micro-finance. The follwoing link is an interesting one on Corporate Social Responsibility and business. http://www.developmentcrossing.com/profiles/blogs/the-washington-post-equates

3. July 23rd, 2010 at 12:40 pm, k a prasanna ()

   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.

4. July 25th, 2010 at 10:36 am, k a prasanna ()

   IPO ANALYSIS: SKS MICROFINANCE LIMITED – MODERN DAY SHYLOCK - AVOID

   Andhra Pradesh government cracks down on predatory practices of Microfinance Institutions
   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.
   I PO ANALYSIS:

   The ultimate goal of microfinance is to enable the poor to build assets, increase incomes, reduce vulnerability to shocks and economic stress and improve quality of life by enabling better access to education and healthcare. The microfinance industry has grown at a rapid pace across the world and has created a positive impact in the lives of millions of poor people.

   The Micro Finance Institutions, instead of providing credit at affordable interest rate, exploiting the situation and looking for a return on investments in excess of 30% p.a. The borrowers pay exorbitant rate of interest. Most of their income goes for servicing the debt with no savings. This kind of situation is no better than the one the poor borrowers had experienced with the traditional moneylenders. They also defeat the very purpose of establishing the Micro Finance Institutions.

   Micro finance should not be viewed as a business venture where one can expect very high return on investments. Governmental and statutory regulations, including the imposition of an interest-rate ceiling, are bound to happen. This will adversely affect the operating results. More importantly, the sector, which sucks the blood of the poorest of the poor, (very high interest rates) does not deserve any support. The IPOS will make the promoters, and other venture capitalists including some P/E funds that have stakes in these companies’ millionaires. And the hapless borrowers continue to live in abject poverty. It is time that the regulators look into this ugly side of micro financing.

   Despite the vast expansion of the formal credit system in the country, the dependence of the rural poor on moneylenders continues in many areas, especially for meeting emergent requirements. Such dependence in the case of marginal farmers, landless laborers, and petty traders and rural artisans belonging to socially and economically backward classes and tribes whose propensity to save is limited or too small to be mopped up by the banks.
   Micro finance is the provision of financial services to low income clients, including consumers and the self employed that traditionally lack access to banking and related services. It is a movement whose object is to create a platform, for as many poor and near poor as possible, to have permanent access to an appropriate range of high quality financial services, including savings, insurance and fund transfers, at an affordable cost. Those who promote microfinance generally believe that such access will help poor people out of poverty. Microfinance is one of the tools that can reduce the suffering of people by financial services that enable the poor to use the existing knowledge and experiences.

   In 1994, the RBI constituted a Working Group on NGOs and Self Help Groups (SHG). On the recommendations of the Group, the Reserve Bank advised that the banks’ financing of SHG should be reckoned as part of their lending to weaker sections and such lending should be reviewed by banks at regular intervals. As a follow up of these commendations, the RBI took a series of measures in April 1996 to give a thrust to micro-finance based lending. Currently, all loans by banks to MFIs are categorized as priority sector lending, that banks have to fulfill as part of their social obligation and regulatory requirement.

   Usurious rate
   The interest rate applicable to loans given by banks to micro-credit organizations or by the micro-credit organizations to Self Help Groups/member beneficiaries is left to their discretion. Since the advances to MFIs are classifieds as priority sector advances, the applicable interest rate is around 15%p.a. However, the MFIs are collecting interest between 24% to 36% p.a. from the hapless borrowers. The Micro Finance Institutions, instead of providing credit at affordable interest rate, exploiting the situation and looking for a return on investments in excess of 30% p.a. Micro finance should not be viewed as a business venture where one can expect very high return on investments. RBI should put a cap on the interest to be charged on the end users, as most of their income goes for servicing the debt with no savings. This kind of situation is no better than the one the poor borrowers had experienced with the traditional moneylenders. They also defeat the very purpose of establishing the Micro Finance Institutions.
   The RBI should also exercise greater control over MFIs, bring more transparency in their operations and derecognize the MFIs, which are known for bad corporate governance.
   RISKS / MATTERS OF CONCERN:

   SKS has limited operating history and the fast growing and rapidly evolving business make it difficult to evaluate the business and future operating results.

   The company has no dividend history.

   The report of the audited financial statements for the year ended March 31, 2009 records statements that there were delays in the deposit of undisputed statutory dues to appropriate authorities and there were instances of fraud on the Company by employees.

   Governmental and statutory regulations, including the imposition of an interest-rate ceiling, may adversely affect the operating results.

   RECOMMENDATIONS

   The promoters/share holders are being profited at the cost of the hapless poor, down trodden and other weaker sections of the society. Unethical and unsustainable business model. The initiatives taken by the Public Sector Banks - for financial inclusion will make the presence of MFIs in rural areas irrelevant in the next couple of years. Even otherwise government will not be a mute spectator to the exploitation. Government is bound to regulate the interest rate in favor of the beneficiaries, which will make these kind MFIs redundant. AVOID.

5. July 26th, 2010 at 7:59 am, Dr S Santhanam ()

   Prasanna’s observations are more emotional. Just because Mohd. Yunus of Grameen Bank has expressed his anxiety about businessmen entering MF sector, one should not pre-judge the move of SKS. There are good examples of for-profit NBFCs in India like BASIX running MF business on commercial business model. Going for an IPO is in fact, the next logical step and reflects the willingness of SKS to accept public scrutiny of its organisational functioning. The promotors taking higher remuneration, taking ESOPs etc., should not be criticized as these are legally permitted. If people like Narayana Murthy of INFOSYS has committed his time and funds, it means that he would not have done risking his name. so, let us welcome the IPO.

6. July 26th, 2010 at 9:50 am, k a prasanna ()

   There is nothing emotional about my observations. I reiterate that it is sin to charge interest around 40% p.a. for the money lent to the poor, down trodden and unfortunate sections of the society. Regarding my observation on the salary/ESOP - it is a reflection of the mind set of the people who are trying to remove poverty. Infosys mentor has invested in the company for capital appreciation. There is nothing great in it.

7. July 30th, 2010 at 4:10 am, Jatinder HANDOO ( FINO Ltd) ()

   First thing First: We need to accept it openly that the business of microcredit is no longer a “social business”. Once this is clear, there should not be any conflict in ideology. And if going Public means reaching out to more enterprising poor and generates hope among poor people - this is good.
   But more interesting would be to follow if SKS’ IPO is going to be a gamechanger across MFI sector in India? . Shall we see more MFIs coming up with IPOs or will it reverse the market trend which means back to “Social Business”. The larger question is : Is the success of SKS IPO more more important for the whole capitalist system itself rather than the SKS? : Let’s see how agents of capitalism steer through the turning point.

8. July 31st, 2010 at 5:03 am, Facts right ()

   KA Prasanna…you are biased and are stubborn and do not want to look beyond what you assume things to be like. Many of the things you have mentioned is not right. The interest has never been 40 per cent. its an average of 26 per cent. Narayan Murthy if it was purely a investment…he would have surely planned an exit with this IPO. He would not have accepted to be the chair of SKS’s advisory board and work on growth plans and corporate governance. All the existing VCs are not looking at an exit route…so is the management team…all of them have locked in their shares for a three year period. If the cost of borrowing for the MFI is over 9 per cent and the operations cost over 11 per cent and various provisions has to be made as per RBI norms…the 26 per cent avg interest is still ok. SKS has history of reducing interest when they achieve economies of scale. Look at states like AP, Karnataka, WB and Orissa…the ROI has dropped from 15 % flat to 12.5 percent flat. In your other post i have other post i have replied on your PSUs reaching poor…60 yrs…still India is waiting for that day to happen…plus…so much of paper work happens that a poor gets intimidated to apply for a loan in a bank. there steps in a Middle man who takes commission for getting the work done…sometimes bribe. Look at other indirect expenses like travel to the bank location for the village…loss of income for that day as they dont have CLs like most of us do…add all that up…works out more expensive than what the 12.5 per cent flat MFIs charge. Direct cost might be cheaper…but associated costs are so high that makes them even more poor. This is not my study…there is a report by world bank on this… Stop being biased.

9. August 3rd, 2010 at 8:29 am, Dr S Santhanam ()

   SKS IPO by getting about 14 times its offer, has set a new benchmark for other MFIs waiting on the wings to go public. We may expect more MFIs like Spandana Sphoorthy Financial Ltd, Share Microfin Ltd, Asmitha Microfin and Bhartiya Samruddhi Finance will be coming with their IPOs.

10. August 3rd, 2010 at 8:32 am, Dr S Santhanam ()

    With so much discussions on SKS IPO, I suggest that CGAP to seek the comments and opinions of some of the investors who command respect among the Indian Public and abroad,like Narayana Murthy of Infosys, Mrs Aga of Thermax and Mr Gurcharan Das on why supported SKS at different points of time. This will put at rest the negative publicity given to the company.

11. August 5th, 2010 at 7:11 am, V.Rengarajan ()

    Some food for thought to look for with the SKS IPO issue for avoiding emotion and biases.
    The status of MF and MFI
    Can Micro Finance be equated logically with other Finance despite the word ‘ finance ‘ is suffixed after ‘Micro?’ or can we equate ethically MFI with other industries in general and other financial institutions in particular taking cognizance of their respective vision , mission and market profile? Do these players (MFI & other FIs) enjoy the same level playing ground for their activities?
    The power of romanticized MF and powerless process of productive investment Every institution or industry has right to seek capital through IPO for their growth and has responsibility to honor their commitment to the investor or equity holders from their earnings, The spectacular performance of SKS IPO indicates how the romanticized Micro finance is able to attract the socially conscious investors on one hand and mobilize significant quantum of funds from the growth potential of the largely untapped capital market…Here return to capital assumes importance .to all the participants. In this context, will there be any difference in the ‘process of investment and earning‘( productive investment/ income generation / profit realization) right from the ultimate user of equity capital in the given market niche for MFI ( mostly informal sector with the SHG/poor clients ) and for others FIs(mostly in the formal sector with non poor clients)?
    Regulation
    Taking cognizance of the lessons from the functioning of the Regional Rural Banks in Indian rural financial landscape, started in 1975 ceremoniously with the mission for the exclusive inclusion of rural poor in the battle against poverty and subsequently drifting to urban non poor also and ultimately merging with sponsoring banks unceremoniously in the formal sector, a question begs ‘is the ‘regulatory and supervisory mechanism’ adequate enough to ensure prevention of MFI’s mission drift – development to commercial - in the non formal sector?
    Validity of the product as a panacea for the poor
    4.In the context of Indian Prime Minster’s concern, anguished during IEA conference recently held in Bhuneswar, that the ‘decline in poverty has not been as fast as one would have wished and it remains a major challenge before the country because of the poor are still too poor’, Is this situation, in poverty sector prevailing a) in spite of aggressive micro financing (micro credit only) by various financial institutions including MFIs with mandatory target from supply side or b) because of multiple financing , multiple borrowing with the poor credit absorbing infrastructural facilities, near micro credit saturation market ,over indebtedness , in the demand side?.As a corollary to the above one, two more questions
    a)Whether ‘micro credit alone’ being the only portfolio of the MFI seeking IPO is adequate to do the ‘magic’ in the poverty sector ? Can we establish a causal relationship between the micro credit and income generation or poverty reduction without any assumption? ( The related issue ‘ questioning the validity on the impact of micro credit’ in MF arena, has become a hot topic’ in many postings in CGAP blog )
    Shift from micro credit to micro insurance
    b) It is an acknowledged fact that Micro finance is a package of financial services including micro savings, micro credit , micro insurance , transfer services and other services required for the poor.If the MFI design their portfolio management for micro insurance also with or without micro credit and eventually facilitating making a substantial dent in poverty canvas, will their approach for IPO justified without any criticism?
    In fine can we expect the initial successful Financial market inclusion of MFI (SKS) would also lead to more ultimate successful micro financial inclusion of the poorest ?
    While the ‘end ‘result in MF game (poverty reduction) assume more important and the means such as IPO, ROI,VIP/celebrity Investing, are all subjective and secondary ones. let us therefore wait and watch the ‘end ‘ performance of SKS as MFI in the battle against poverty. during post IPO venture period in the given regulatory environ.

12. August 5th, 2010 at 9:13 am, Greg Chen ()

    Later this month CGAP will be releasing a breakdown on the significance of the SKS IPO and we would like to stimulate further discussion with that piece.

    In the meantime, we can begin to digest the details of the IPO transaction and have a chance to begin to ask what it all means. Certainly we can begin to contemplate the implications of the ending price band which SKS attracted - this was significantly higher than some expected. Dr. Santhanatham’s speculation about whether other MFIs are gearing up for future IPOs is an interesting discussion.

    Many of the comments, particularly from K A Prasanna refer to a set of debates and discussions that are well beyond the IPO - that is, the role of MFIs in general within wider efforts to drive financial inclusion. This is a far reaching debate and I would only comment that India is fortunate to have an array of different approaches to financial inclusion. And as Amartya Sen highlights in the Argumentative Indian there are always a full range of views contributing to the debate in India!

13. August 17th, 2010 at 8:36 am, Fehmeen | Microfinance Hub ()

    The true intent of the SKS IPO will be disclosed only a year or two later because by then, the ‘promised change’ should have materialized. While we cannot say much about that, here are some figures to get everyone thinking:

    - Mr. Vikram Akula made around $12 million because of the deal - he only sold 25% of this shares, one can imagine what the other 75% will be worth.
    - the share price is abnormally high (Indian Rs. 800 or so, equal to $17) compared to the minuscule face value of the shares (Indian Rs. 10, equal to $0.21). We could see this price follow the Bank Compartamos case - http://microfinance.cgap.org/2009/06/25/why-are-compartamos-interest-rates-dropping-was-buying-their-stock-a-good-deal-and-other-tidbits/

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