Mumbai: A little more than a year ago, in October 2010,SKS Microfinance Ltd, then India’s largest microfinance institution (MFI), sacked its chief executive officer (CEO) Suresh Gurumani after a blockbuster initial public offering (IPO). The exact reason behind his sacking is not known even today, but it was clear that founder and chairman Vikram Akula was not getting along with him.
At that time, Vijay Mahajan, a well-known figure in the Rs20,000 crore Indian microfinance industry, and chairman of the Basix group, was quoted in the media as saying: “What we are witnessing reminds me of a Greek play. I only hope it doesn’t end in a tragedy.”
That may indeed come to pass for Akula, with the SKS board likely to bid him farewell. It can happen as early as Wednesday, even though the formal agenda of the board meeting that will take place in Mumbai doesn’t include Akula’s exit as a resolution.
Akula will have no place in SKS any more and it has been decided that he will quit the company, at least two persons familiar with the development said.
“Post-IPO, he is no longer the promoter of SKS. If he is not the chairman, in what capacity will he remain on board?” asked one of them. Neither of them was willing to be named, considering the sensitivity of the issue.
Akula may not be formally ousted and instead he will resign, they said.
An SKS spokesperson denied Akula’s termination, but declined to elaborate on this. Akula could not be reached for comment.
P.H. Ravikumar, an independent director, may be appointed as non-executive chairman at Wednesday’s board meeting. Akula may remain with SKS till end-December.
Ravikumar, CEO of Invent Assets Securitisation and Reconstruction Pvt. Ltd, and former managing director and CEO of National Commodity and Derivatives Exchange Ltd, declined to comment for this story.
New business model
Along with the exit of Akula, the board is also set to change the business model of SKS. From an MFI, it will be repositioned as a rural financial services company covering mortgages, insurance, payment channels such as automated teller machines, among other things, in addition to tiny loans. It will also go for many new products for which the blueprint is expected to be cleared by the crucial Mumbai board meeting.
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While Akula’s exit is being prompted by activism of independent directors, last-minute negotiations were on, even at the time of writing this story, with private equity investors on the terms and conditions of his exit.
For instance, he may sign a non-compete agreement saying he will not enter the MFI business space in the next few years and will not poach any employees of SKS. “We hope to sort these out and I will be very surprised if Akula stays back as he does not have too many supporters within the firm,” said the second of the two persons cited above.
Akula holds shares in SKS through the employees stock options scheme, but at the current market price their value will not be too much, this person said.
The SKS stock has lost 92.6% between its lifetime high of Rs1,490.70 in September last year and Tuesday’s closing price of Rs110.50, which is below its book value. If Akula exercises his options after fresh fund infusions that the company is planning and if the stock price rises to at least Rs200, he is expected to get around Rs12 crore. What stake Akula currently has in the company is not known.
The conflict with independent directors began after Akula started interfering in the day-to-day operations of SKS following Gurumani’s ouster and M.R. Rao was appointed as chief executive officer and managing director.
Rao, chief operating officer earlier, had not been found suitable for the top job, which is why Gurumani had been brought in. After Gurumani’s ouster, he was asked to run the company, assisted by S. Dilli Raj, SKS’ chief financial officer. However, Akula soon started having “strategic differences” with the duo. Akula even formed a committee of senior executives that reported to him directly on day-to-day operations.
The flashpoint was reached a few months back when the board dismantled the committee. It also asked Akula to stick to offering a strategic vision, which the chairman of a firm is expected to do.
There were other instances as well in which the board was in conflict with Akula. For instance, Akula wanted SKS to stop paying investors in short-term commercial paper floated by the firm. SKS had to borrow through commercial paper as banks were not giving money to MFIs following the crisis that was triggered by a stringent new law in India’s fifth largest state Andhra Pradesh, home to one-fourth of the country’s tiny borrowers by volume.
Akula was also in favour of staging a show of strength by assembling millions of SKS borrowers in Andhra Pradesh to protest against the state law. Both the ideas were scrapped by the board.
One of the independent directors, Pramod Bhasin, former president and CEO of Genpact, left the board recently, as he could not get along with Akula, one of the two persons said.
Bhasin could not be contacted.
Other independent directors include Tarun Khanna, professor of Harvard Business School; Geoff Wooley, managing director of Huntsman Gay Capital Impact Partners; and V. Chandrashekharan, a director nominated by Small Industries Development Bank of India.
Paresh Patel, CEO of Sandstone Capital Advisors, and Sumir Chadha, managing director of WestBridge, are representatives of the private equity funds on the board. Patel declined to comment for the story and Chadha could not be reached.
Akula, Indian microfinance industry’s poster boy, founded SKS as a non-profit organization in 1997 and led the organization until 2004, when he took a sabbatical to join McKinsey and Co. in Chicago as a management consultant.
In 2005, he returned to SKS, converted it into a for-profit finance company and brought in venture capitalists such as Vinod Khosla and Sequoia Capital besides investors including George Soros and N.R. Narayana Murthy, co-founder of Infosys Ltd.
SKS entered the capital market in August 2010 with its public float, which was oversubscribed 14 times.
Two months after the IPO, Gurumani’s sacking drew a lot of flak from the industry with many finding Akula running a one-man show and undermining corporate governance standards. Gurumani, whose service was terminated four years ahead of the expiry of his contract, threatened to take legal action, but the company later reached a settlement with him. The value of his severance package is not known.
“What I can tell you categorically is that corporate governance is the integral part of any good MFI and there can be no compromise on that,” said Alok Prasad, CEO of Microfinance Institutions Network, an industry association of microlenders.
“From our standpoint, as an industry body, we have been hammering the message about the need to incorporate good corporate governance in the running of the institution. That is our consistent message to all our members,” Prasad said. He refused to comment on SKS specifically.
The Andhra Pradesh law
Incidentally, Gurumani’s sacking almost coincided with the Andhra Pradesh law that was promulgamated in the wake of a series of suicides due to alleged coercive recovery practices by some MFIs.
MFI loan collection rates fell to 5-10% as a result of this as borrowers were actively encouraged by local politicians not to pay back money. As bad assets piled up for MFIs, banks stopped giving them loans. Typically, MFIs borrow from banks at 12% and give the money to tiny borrowers at 24-36%.
SKS has seen a drastic 34% decline in its net worth since March because it wrote off loans given to Andhra Pradesh borrowers. Its net worth slipped to Rs1,181 crore in September fromRs1,780.82 crore in March. Total provisions and write-offs by SKS rose 21 times to Rs353.34 crore in the September quarter from Rs17.3 crore in the same quarter last year.
SKS was the largest MFI in the country until recently when it lost the top slot to Kolkata-based Bandhan Financial Services Ltd in terms of total loan book. SKS’ total loan book stood at Rs2,635 crore in September. In comparison, Bandhan has given loans worth Rs2,713 crore.
SKS posted a loss of Rs384.54 crore in the three months ended 30 September compared with a loss of Rs218.74 crore in the preceding quarter and Rs80.54 crore net profit in the year-ago period. Total income declined to Rs123 crore in the September quarter from Rs367 crore a year earlier.
The crisis in the microlending sector had prompted the Reserve Bank of India (RBI) to issue regulations early this year to govern MFIs operating as non-banking financial companies. This was based on the recommendations of an expert panel headed by Y.H. Malegam.
The new rules capped the interest rate MFIs can charge at 26% and made a minimum two-year tenure mandatory for all loans above Rs15,000.
In July, the government had placed a draft microfinance Bill that sought to put MFIs outside the purview of state-level legislation by stating that those MFIs registered with RBI won’t be treated as moneylenders. India’s Parliament is expected to discuss the Bill during the winter session.
Persons familiar with the development at SKS said Akula’s exit will not affect the company’s proposed Rs900 crore fund-raising plan. Earlier this month, the SKS board had approved a sale of fresh equity through a qualified institutional placement. It is also raising its authorized share capital from Rs95 crore to Rs135 crore.
The company’s chief financial officer Dilli Raj recently said the company may have to write off its entire Andhra Pradesh portfolio. The loan portfolio amounts to Rs822 crore in Andhra Pradesh, its biggest market. It has already written off Rs678 crore of loans.
“There are many takers for our Rs900 crore money-raising plan. The stock is now trading at less than its book value and at this price, many large private equity funds are interested to invest in SKS. It will raise Rs900 crore by January,” one of the two persons said.
He also said that after adopting the new business plan, the company will strive hard to cut operating expenses. Currently, its cost of funds is 11-12% and operating expenses are 9-10% and this is why it cannot lend at less than 24% or so. Once the operating expenses come down, it will be able to pare loan costs for borrowers.
Employees have been leaving the company in droves. In the March quarter alone, 3,000 SKS employees left the company. SKS is not looking to retrench workers even though times are tough.
“It will redeploy people in the new business model. Akula was in favour of shedding the fat, but the board did not accept the idea,” said one of the two persons quoted earlier in the story. As of March, SKS had 22,733 people on its payroll.
SKS shares dropped 4.99% to close at Rs110.50 on Tuesday on BSE as the benchmark Sensex rose 0.75% to end at 16,065.42 points.
SKS is one of the two leading microlenders in Andhra Pradesh that opted out of corporate debt restructuring (CDR) when banks offered firms the option to do so. The other MFI that did so is Vijay Mahajan-promoted Bhartiya Samruddhi Finance Ltd.
Trident Microfin Pvt. Ltd, Share Microfin Ltd, Asmitha Microfin Ltd, Spandana Sphoorty Financial Ltd and Future Financial Services Ltd opted for the CDR programme.
“This business is not about personalities. A microfinance institution can continue to do well even if a key figure leaves the company, provided the operating model is sound and right business processes are in place,” said the head of a large MFI who didn’t want to be named.
Early this week, Akula was scheduled to meet journalists from select media houses in Mumbai, but later postponed the meeting to Wednesday after the board meeting of SKS. Interestingly, while the public relations of SKS is being handled by the agency Adfactors, Akuala has employed a separate company—Ogilvy Public Relations—for his media interaction.
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Graphic by Ahmed Raza Khan/Mint
Ashwin Ramarathinam contributed to this story