Founder chairman of SKS Microfinance, Vikram Akula, was under the cosh in 2004 - fighting a bitter divorce with estranged wife Malini. Rushing back to Chicago, Akula found himself in a debt trap, as he completed his doctorate along side. Finding himself staring at a $90,000 mountain of debt, Akula joined McKinsey & Co as a consultant to earn some dollars. Ironical for a man who is offering micro finance to rural poor.
A quintessential idealist, Akula studied philosophy and political science. He told India Today's SANDEEP BAMZAI that business doesn't run in his DNA nor did he train for it - all he wants is to solve the problem of poverty by giving the needy access to finance. It is for this that Akula spends about three to four days in his Hyderabad office, finetuning product design and processes. Two days are spent in the field, traveling to the 19 states where SKS has its business.
The founder's problems began when he announced a $350 million initial public offer (IPO) of the organisation earlier this year. After staying under the radar for years, he was suddenly given a multi-millionaire tag. And this pitchforked him into the big league in Andhra Pradesh. Since then SKS has hurtled from one controversy to another, resulting in the micro finance ordinance which is now impacting his enterprise. Excerpts from the interview:
A week after the end of the 40-day listing silent period, CEO Suresh Gurumani was asked to go. Why did this happen?
The decision to terminate Gurumani was a unanimous decision. The Board took the decision as post the IPO, interpersonal differences emerged between Gurumani and members of the management team, including some of his direct reports. They felt it was the right decision for the company and its shareholders. The Board didn't want interpersonal differences to come in the way of the management's ability to perform. It stands by the decision.
Does it cast a shadow of doubt over the way this industry is run?
No.
There was some controversy over selling your less than five per cent stake before the IPO to a hedge fund - Tree Line Asia. The Securities and Exchange Board of India (Sebi) had reasoned since you are not a promoter and owned only stock options (not fully paid shares), you needed to treat it as sweat equity and transfer it to SKS Mutual benefit Trusts…
In 2005, SKS Microfinance received an NBFC license and in August 2005 the microfinance portfolio was transferred from Swayam Krishi Sangam (the NGO that I established initially to set up the microfinance program) to the company. In turn, SKS Trusts, which I set up on behalf of our microfinance borrowers, received "sweat equity" to the tune of 40 per cent of SKS NBFC. I felt it would be unethical for me personally to receive any benefit from value created in a non-profit, so ensured the entire sweat equity went to SKS Trusts.
In 2006, first round shareholders gave me stock options at the existing price of the time. I was also given stock options in a investment round later. I held on to those options and completed an exercise and sale of 25 per cent of my options to Treeline in February 2010. I sold them at the time, despite the Sebi guidelines, because I had voluntarily agreed to lock-in 75 per cent of the options for 3 years after the offer. I did so to signal my commitment to the company. In order to get extra liquidity, I sold the options before the IPO. I was not permitted to exercise options after the filing of our draft prospectus, since it would led to change in capital structure and the sale was the only way to get liquidity for three years.
Note that if Vikram had paid up shares (equity in the company) as most promoters do, he would not have sold them before the offer and instead done so alongside other promoters during the IPO. However, because he felt it was ethical to ensure the entire "sweat equity" at the time of transformation to NBFC went entirely to the Trusts, he did not own any shares. His holding was only in the form of options.
By way of further background, an individual with options cannot be locked in as a promoter, under Sebi guidelines. Nevertheless, Vikram has voluntarily locked in all his options - 75 per cent of his initial holding. In normal course, if he was a classical promoter with sweat equity, he would have owned all his shares and then sold 25 per cent of his holding at the IPO and been required to locked in the balance 75 per cent.
However, since he held options and not shares, he could not do so, as Sebi requires all shares to be fully paid prior to filing the Draft Red Herring Prospectus (DRHP). The transaction had to be done before the filing. In short, the only opportunity for sale of shares was before the filing of DRHP. Since Vikram was locking in the balance of his shares for 3 years, the company felt it reasonable for him to have liquidity - just as other promoters will when they offer a secondary at the IPO.
Is your business model similar or different from Mohd Younus's Grameen bank?
We follow the essential elements of the Grameen Bank model, when it comes to products and processes. For example, we use the five member peer-group lending model and income generating loans, with small weekly repayments that mimic cash flows. This comes right out of Grameen.
Where we differ is that we believe a for-profit NBFC structure enables us to access greater pools of funds and therefore scale up to many more poor households. We have taken this path because unlike Grameen Bank, we are not allowed to take deposits as a source of funds and because the scale of poverty in India is larger than that of Bangladesh. Therefore, funding is a greater constraint.
How does the Andhra Pradesh ordinance on micro finance impact your business?
It has disrupted our work over the last few weeks, but we are in dialogue with the government and are confident we will be able to restart our microfinance activities soon.
Why do you think this ordinance was promulgated?
One reason is that some rogue financiers have been established and are using unethical practices. In some cases, these are traditional loan sharks who have simply called themselves microfinance institutions. But they don't practice ethical lending in the way NBFCs registered with the Reserve Bank of India do. We of course welcome any steps that will prevent any unethical practice and will support the government in their efforts to hold accountable rogue financiers.
Give us a background of the bitter custody battle that you fought with your wife Malini Byanna. It happened just before the IPO...
My son's long-term welfare prompted me to file for custody. For me, the paramount concern is, and always has been, my son's well-being. Unfortunately, this is now a legal proceeding and there is a court gag order in place. It is unfortunate that my ex-wife has violated this gag order that is meant to protect our son. It would not be appropriate in the well-being of my son to pursue it in the press. So, I will not be commenting further.
The High Court has clearly told SKS to get shareholders nod before appointing a new CEO...
This is incorrect. Suresh Gurumani, by virtue of being managing director of the company, was an employee and also a director on the Board of Directors. These are two separate capacities.
1. At the Board meeting which concluded on October 04, eight out of 10 directors were present and otherwise participating in the meeting. The two directors not present were Suresh Gurumani, who was an interested director and another nominee director who was traveling and unable to attend the meeting. All the directors present or otherwise participating in the meeting, unanimously decided to terminate the employment of Suresh Gurumani, as MD and CEO of the company forthwith. Thus, pursuant to the said unanimous resolution passed at the Board meeting concluded on October 04, Suresh Gurumani's employment with the company as MD and CEO was terminated. In accordance with his terms of employment, Gurumani was provided with requisite compensation in lieu of notice.
2. As on date, Suresh Gurumani continues in his capacity as a director on the Board of the company, since a director cannot be removed, except by following the prescribed process under the Companies Act, 1956.
Andhra Pradesh High Court Order
A shareholder holding 18 shares (which is less than .00002 per cent of the company's share capital) has filed a petition requesting the Andhra Pradesh High Court to direct SKS not to give effect to the Resolution passed by the Board on October 04, terminating the appointment of Suresh Gurumani as managing director and CEO of the company. The Justice, pending disposal of the application/petition, did not grant the prayer and passed an order on October 08. Please note the following clarifications in connection with the said High Court order:
1. The petition was filed under the mistaken assumption that the Board of the Company has sought to remove Suresh Gurumani as a director of the Company, through a Board resolution, which in fact (as explained above) is not case.
2. At the hearing, the company counsel clarified that Suresh Gurumani continues to be a director on the Board of the Company. This clarification was recorded by the Hon'ble Court in its order.
3. The Court has not granted the petitioner's prater for stay of the termination of the employment of Suresh Gurumani in its order. Effectively, the Court upheld the Board's right to terminate Suresh Gurumani.
4. In relation to the appointment of new MD and CEO of the Company, the Court has observed that "in tune with the provisions of the Companies Act, 1956, managing director and CEO of the respondent company shall not take any major policy decisions concerning the respondent company, without prior approval of the Board of Directors."
This order therefore does not restrain the current managing director, but simply restates a statutory provision of the Companies Act 1956 that already exists: namely, that any major policy decisions should be approved by the Board of Directors. That is true for every company in India, listed or unlisted.
There have been over 30 suicides by borrowers? Is microlending leading to over-indebtedness?
Whenever any individual takes his or her own life, it is always a tragedy and our heart goes out to the family. However, suicide is a complex issue and there are a number of factors that contribute to suicides. In the 13 cases of SKS borrowers committing suicide, each one had a reason unrelated to our microfinance lending - ranging from harassment from in laws to domestic disputes with a husband.
I should also note that in all the cases, none of the SKS borrowers who committed suicide were defaulters. So, there is no question of having put pressure for collections. In addition, our systems and culture is designed to ensure ethical lending. For example, there is no incentive to loan officers on loan sizes. This ensures our field officers are not under any pressure to lend amounts higher than what the borrower can repay.
In addition, our field staff are not incentivised on collections. This ensures there is no pressure for collections when people have difficulty. In fact, we make provisions for write offs in hardship cases. Finally, in our 13 years of operations, across 100,000 villages in 19 states, we have never been accused of contributing to suicide.
How much money have you dispensed over the years and to how many people?
Over the past 13 years, SKS has distributed Rs 19,841 crore. We have a current member base of 7.8 million.
How do you deal with delinquencies?
Our model follows the Grameen Bank format of group lending to 5 women. It is a joint liability model. If a borrower is not able to pay, the other members of the group help her out. In case the borrower is not able to repay and the group is not willing to help out, we end up writing off the loan as a hardship case and not lend to that individual again.
Who are the Silicon Valley types who have invested in your venture?
Prominent investors include Vinod Khosla, Sequoia Capital, Catamaran, Kismet and Sandstone.
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