SKS Microfinance Ltd’s managing director and chief executive officer (CEO) M.R. Rao and chief financial officer Dilli Raj were seen leaving the firm’s crucial board meeting in Mumbai on Wednesday much before it got over. From private equity fund Sandstone Capital Advisors Pvt. Ltd’s office, where the board meeting was held, the duo hopped across to State Bank of India (SBI) headquarters in Mumbai’s business district Nariman Point. A meeting was scheduled with SBI’s two managing directors to discuss India’s lone listed and till recently the biggest microlender’s new business strategy—conversion from a microfinance institution (MFI) to a multi-product rural financial services company.

Changing fortunes: SKS Microfinance founder Vikram Akula. Photo: Hemant Mishra/Mint

The decision to change the business model was taken at a meeting in San Francisco in August, and even though SKS founder chairman Vikram Akula endorsed it at that time, he started opposing it later. But Akula’s ouster from SKS was not the result of serious differences on strategic issues between him and other senior executives and/or the board as it has been made out to be. The problem was elsewhere.

The SKS saga is the story of a clash of personalities. The dramatis personae in this theatre of the absurd are Akula, Rao, Raj and former CEO and managing director of SKS, Suresh Gurumani.

Indeed, the independent directors of the SKS board such as P.H. Ravikumar, Tarun Khanna, Geoff Woolley and V. Chandrasekaran played a role in Akula’s exit, but they could do so only because of the aggressive initiative of two shareholders who are also directors—Paresh Patel, CEO of Sandstone Capital Advisors, and Sumir Chadha, managing director of WestBridge Capital. Both saw massive erosion in the value of the firm because of the conflict between Akula and the Rao-Raj duo. The stock lost at least 90% since September 2010 and is now trading at less than its book value.

The first time the independent directors of SKS found something amiss in the firm’s corporate governance was when N.R. Narayana Murthy’s Catamaran Ventures was given a stake in the company at a price lower than what other investors (who had come in earlier) had paid. The company also instituted an advisory board, headed by Murthy, which neither had any other member nor held meetings. Apparently, Akula defended the pricing by saying it had been committed to earlier. The board ratified the sale treating it as a one-off case because Murthy’s integrity is unquestionable.

The first clash happened when Akula, backed by Rao and Raj, wanted to throw Gurumani out in October 2010 after SKS’ blockbuster initial public offering (IPO). Gurumani was appointed as CEO because the board did not find Rao fit for the top job. Rao himself was instrumental in bringing Gurumani on board, but the two later fell apart. The Rao-Raj combination and Akula did not find Gurumani adding much value to the company and claimed he was spending more time in Mumbai with his family than in Hyderabad where the firm is based.

At least one independent director put his foot down against this, as Gurumani had steered the historic IPO and wrote a dissent note against his ouster. He was persuaded to withdraw this by other members of the board, who pointed out that an on-the-record dissent note would weaken the company’s case should Gurumani legally challenge his ouster.

Rao was made the CEO and managing director after Gurumani’s ouster, but Akula continued to interfere in operations. SKS insiders say Akula has vision and passion, but lacks the ability to execute plans. They also claim he becomes insecure about his role and position if he is not operationally in control. He tried to do so by setting up a committee of executives who would directly report to him, bypassing the managing director and CEO, but the independent directors scrapped this arrangement as they expected the chairman to be the guiding light of the firm and not a hands-on manager.

Once the committee was dismantled and Rao was asked to oversee day-to-day operations, Akula found himself completely isolated. He used to come to office and stare at the wall in his room. Almost nobody would talk to him.

Earlier, Rao and Raj had joined hands with Akula o throw Gurumani out, but after that mission was accomplished, the group split, with Akula in one camp and the duo in the other. At the San Francisco meeting, when the decision was made to change the business model, Akula did not protest and also endorsed a decision to get into gold loans. But later he expressed his reservations on changing the character of the company. Subsequently, Ernst and Young was appointed to conduct a forensic audit of SKS. It is yet to submit its report.

Once the two shareholders’ representatives found the firm losing its value fast because of the infighting, they stopped supporting Akula, who, after the IPO, virtually did not hold any stake in SKS. The two directors increased pressure on Akula to quit when he asked for an extension to exercise the first tranche of his employees stock option scheme. Akula has been given two tranches of these schemes and some time in August he was “in money" for the first tranche (this means, the market price of the stock was higher than the price at which options were given to him and he could make money by selling them), but he could not arrange the money to pay for his stock option schemes and hence wanted more time to exercise it. He was allowed to do so after he committed to quit SKS.

Wednesday’s three-hour board meeting was bereft of acrimony and Akula carried himself with dignity. The meeting took as long as it did because there were several formalities to be completed—for instance, Akula had to give back the company laptop and minutes of past board meetings, which were with him. He also had to sign papers saying he would not start a venture that would compete with SKS and poach employees. There was no severance package even though Akula had completed only about a year of his three-year term as chairman because, under Indian law, there is no provision for compensating for the unserved period. Besides, there are tax implications as Akula continues to be a US citizen.

After SKS, Akula plans to start a new innings in the mobile banking space and I am sure he will do well, as very few can match his passion and vision. He had to leave SKS not because of his greed for money, but love of power. He threw Gurumani out, but when Rao and Raj joined hands against him, he wanted Gurumani to return to tackle the two. Now, with both Gurumani and Akula out, the investors will keenly watch how long the bonhomie between Rao and Raj will last. The board is aware of this and wants to build a second line of leadership fast, along with the change in business model.

Also Read |Tamal Bandyopadhyay’s earlier columns

Also Read | Vikram Akula exits SKS Microfinance

SKS to change business model, Akula may exit

SKS loses top slot as largest Indian microlender

SKS Microfinance posts 385 cr loss in September quarter

SKS to raise Rs900 cr via share sale

SKS may approach RBI for bank licence

Tamal Bandyopadhyay keeps a close eye on all things banking from his perch as Mint’s deputy managing editor in Mumbai. Your comments are welcome at