Mumbai: In a first of its kind, a group of four venture capitalists led by Sequoia Capital India has become the promoter of SKS Microfinance Ltd, as the country’s largest microfinance institution (MFI) prepares to make an initial public offering (IPO).
“This is for the first time in India that venture capital (VC) investors have become the promoters of a company that is going for a public offer,” said Sumir Chadha, managing director of Sequoia Capital India, which owns close to 24% of the MFI with investments worth $30 million (around Rs136 crore).
The other three investors are Sandstone Capital Llc (12%), Kismet Capital Advisors Llc (17%) and SKS Trust for the Benefit of Women Entrepreneurs (15%).
The four investors will replace SKS founder Vikram Akula as promoter of the firm. Akula started the company in 1997. He is also one of the trustees of SKS Trust.
The change of guard at SKS comes after Akula, who holds a 6% stake in the firm, failed to satisfy the Securities and Exchange Board of India’s (Sebi) norms for a promoter of a company making an IPO.
Sebi rules stipulate that 20% of the post-issue capital has to be held by promoters named in IPO prospectus, said Jayant Thakur, a chartered accountant at Mumbai-based Jayant M. Thakur and Co., which specializes in securities law.
A questionnaire emailed last week to SKS chief executive officer Suresh Gurumani and Akula remained unanswered.
SKS is expected to shortly file its draft red herring prospectus with Sebi, a prerequisite for an IPO. Investment bankers familiar with the public offer process said on condition of anonymity that the firm is valued at nearly $2.5 billion. Kotak Mahindra Capital Co. Ltd, Credit Suisse and Citigroup Capital Markets are the bankers for the issue.
SKS Microfinance—which in 2005 converted itself into a non-banking finance company—has lent Rs3,000 crore to seven million customers till December through its 1,675 branches.
In 2008-09, MFIs in India added 8.5 million consumers, taking their consumer base to 22.6 million—an increase of 60%. The growth in their loan book was even more spectacular at around 97% from Rs5,950 crore to Rs11,734 crore.
In terms of consumer acquisition, Spandana Sphoorty Financial Ltd recorded the highest growth rate, 104%. Bandhan Financial Services Pvt. Ltd and SKS Microfinance expanded their consumer base by 91% and 87%, respectively. SKS and Spandana grew their loan books by 214% each.
As loan books grow, valuations of the firms rise and private equity funds are eager to invest in them. Such funds have invested around Rs850 crore in MFIs since 2009 and more money is in the pipeline.
Sequoia Capital’s Chadha expects the trend of venture capital firms investing in microfinance companies will continue as entrepreneurship becomes more democratized.
Sequoia Capital also has a majority stake in two other domestic microfinance firms. Chadha did not disclose the names of the two firms.
“If the purpose is for greater social benefit, then any model acceptable to the promoter and the investor should be fine,” said Viren H. Mehta, director at consultancy firm Ernst and Young India Ltd. Different models will pan out depending on individual promoters, he added.
In India, unlike in developed markets where promoters dilute stake to venture capitalists to expand and capture growth, promoters typically choose to keep a majority stake with themselves.
But Anil Ahuja, Asia head at 3i Asia Ltd that manages a $1.5 billion infrastructure fund in India and oversees 3i’s buyout and growth capital funds in Asia, does not agree with Chadha. Private equity funds are comfortable in taking control of a company, but such opportunities are rare, Ahuja said. These takeovers are exceptions, he added.