Why you should be interested in the SKS IPO

Why you should be interested in the SKS IPO

Mint started life in a temporary office on the sixth floor of a high-rise in New Delhi’s Connaught Place. A state-owned company had moved out, leaving some basic furniture behind, and around 50 of us made do with what was available as our office on the 16th floor of the same building got ready. We spent some mornings discussing story ideas with the two-dozen reporters who had already joined and I remember mentioning at one such meeting that microfinance and cities would soon be entire beats unto themselves.

Three years on, we cover microfinance but still haven’t bestowed beat status on it.

We may soon have to.

India’s best known microfinance company SKS Microfinance will go public sometime next year. The share sale, to my knowledge, will be the second by a microfinance company after Mexico’s Compartamos.

I find the SKS initial public offering (IPO) interesting for a variety of reasons.

As Nachiket Mor, head of the ICICI Foundation and one of the sharpest minds in finance (and other subjects) told a group of Mint editors in September, the SKS IPO will, in many ways, influence the future of the microfinance business in India.

Like elsewhere in the world, there are two scenarios about this. And there are two business models underlying these scenarios.

As first articulated by Connie Bruck in The New Yorker in late 2006—in a way that only the New Yorker can articulate—one model, best exemplified by Muhammad Yunus’ Grameen Bank, is built around the premise that microfinance needn’t be profitable and that it will continue to be powered by donors. The other is built around the premise that the business needs to be profitable to attract investors (much like limited partners, or LPs, fund venture capital and private equity firms).

SKS is a good example of a company trying to follow the second model.

Its challenge isn’t making the model work. It works and there’s enough proof from Compartamos’ financials and SKS’ to show that it does.

Its challenge is to navigate a treacherous regulatory and political terrain.

In India, microfinance has always been seen as some form of charity. So, a microfinance company that makes profits—and which could, some day, declare dividends for its shareholders—will be viewed with suspicion, not just by a section of the left-leaning press and polity, but even by others.

If it manages to change this perception, SKS will find enough takers for its shares. After all, the company is well known. Its investors—most notably among them Vinod Khosla—are equally well known. And SKS founder Vikram Akula is, courtesy a mention in one of Time magazine’s listings of people who matter, even better known. SKS also happens to be profitable. So, the shares will likely be snapped up.

Success, however, will engender its own set of problems.

It will definitely encourage other microfinance companies to sell shares. And not all of these companies will be happy just to make profits from the business. Some, to borrow a term from SKS chief executive officer Suresh Gurumani, whom I met this week, will not be able to resist the temptation to profiteer. And the federal government, state governments and the Reserve Bank of India will then find it difficult not to regulate the business.

I am also not convinced about the merits of a company such as SKS going public.

There is, as several businessmen including Sir Richard Branson have discovered, a great deal to be said in favour of being a closely or privately held enterprise.

I am, however, convinced that the company’s approach is the right one: Charity isn’t a great business model.

R. Sukumar is editor of Mint and will write a weekly column for the newspaper.