SKS Microfinance Cse Report

Case Studies of Entrepreneurship

Term-5th

MBA (FB&E) Batch: 2014-16

Name: “SKS Microfinance”

Submitted to: Prof. Rajesh Kikani

By:

Date:20/09/2015 SMEET JAIN

(144154)

Executive Summary:

Founded as a non-profit in 1998 , SKS (Swayam Krushi Sangam) is the largest MFI in India and one of

the first to show private capital could be used as a means to reach the poor .It reaches over 7.3

million women and has 2226 branches in 100,000 villages in 19 states across the country .It has a 99

percent on-time repayment rate , a disbursement record of over Rs 1600 crore and a net worth of Rs

1016 crore and is one of the fastest growing MFIs in the world .Businessweek named SKS as one of

the top five emerging and influential companies in the world in 2009 and last year , rating agency

CRISIL ranks SKS as first among the top 50 MFIs in India .Its IPO was over-subscribed 13 times .

Despite all its success, the controversial decision by its board to sack its CEO two months after the

IPO has started a crisis. According to a formal employee “Somewhere they have got lost and they

need to revisit their soul”.

The firing of the CEO of SKS microfinance Mr Gurumani has been attributed to power struggle

between him and the dynamic founder Mr Vikram Akula and shows the worst consequence of

principal agent theory.

The Microfinance Story:

Microfinance is a general term to describe financial services to low-income individuals or to those

who do not have access to typical banking services.

Microfinance is also the idea that low-income individuals are capable of lifting themselves out of

poverty if given access to financial services. While some studies indicate that microfinance can play a

role in the battle against poverty, it is also recognized that is not always the appropriate method,

and that it should never be seen as the only tool for ending poverty.

As these financial services usually involve small amounts of money - small loans, small savings, etc. -

the term "microfinance" helps to differentiate these services from those which formal banks

provide.

Credit unions and lending cooperatives have been around hundreds of years. However, the

pioneering of modern microfinance is often credited to Dr. Mohammad Yunus, who began

experimenting with lending to poor women in the village of Jobra, Bangladesh during his tenure as a

professor of economics at Chittagong University in the 1970s. He would go on to found Grameen

Bank in 1983 and win the Nobel Peace Prize in 2006.

Since then, innovation in microfinance has continued and providers of financial services to the poor

continue to evolve. Today, the World Bank estimates that about 160 million people in developing

countries are served by microfinance.

A microfinance institution (MFI) is an organization that provides microfinance services. MFIs range

from small non-profit organizations to large commercial banks. The nature of microcredit - small

loans - is such that interest rates need to be high to return the cost of the loan.

Foundation of SKS Microfinance:

Started in 1997 as a public society in the form of an NGO, Swayam Krishi Sangam (also known as SKS

Society or SKS NGO) went on to transform itself into the largest MFI in India and the fastest growing

MFI in the world, as of September 2009 reaching 5.3 million poor women, or some 20% of all MFI

clients in India.

After several years of operation as an NGO, SKS Society found itself constrained by the not-for-profit

business model. In response to the growing demand of microfinance, SKS Society created a private

company, SKS Microfinance Private Limited in 2003, which became a Non-Banking Financial

Company (NBFC) in 2005.

Business Model of SKS Microfinance:

Since at least 2003, SKS has been focused almost exclusively on developing a model that could scale

rapidly. As a result, the company has long used outreach – the number of poor people reached and

the number of loans granted – as the key measure of its success. It has achieved this by constantly

overcoming constraints to scaling that are present in microfinance. To insure a sufficient supply of

capital, it was the first Indian MFI to raise purely commercial equity; to build capacity, it has adapted

scalable processes from the business world and applied them in the microfinance context; and to

reduce costs, it has extensively invested in technology.

SKS has also invested heavily in standardizing its operations, basing them on an extensive MIS. In

fact, it was among the first Indian MFIs to invest heavily in technology as a means of supporting

growth and driving productivity

When it comes to financing its rapid growth, SKS has been one of the first MFIs to actively engage

the commercial finance market, especially in the private equity space. The frequency of these

capital raises was also unprecedented in the microfinance sector, with five distinct capital raises

since 2006 and each successive deal larger than the first.

Awards and Recognition - Face of Financial Inclusion:

SKS was ranked as the Number 1 MFI in India and number 2 in the world by MIX Market. Business

Week has rated SKS as one of the most influential companies. SKS has received numerous awards

including the CGAP Pro-Poor Innovation Award, the ABN-Ambro/Planet Finance Process Excellence

Award, Citibank Information Integrity Award, the Digital Partners SEL Award, SHG Foundation

funding and the Grameen Foundation USA Excellence Award. SKS is the only MFI in India to receive

the MIX Transparency Certification. SKS was selected by Unitus as the most promising microfinance

organization in India.

SKS microfinance has become the business model for Financial Inclusion in India.

IPO Success - Rs. 2.7 Lakh Cr Microfinance Opportunity:

By market standards, the SKS IPO was a great success. Institutional investors had over-subscribed

their allocations by 13 times, and the company’s valuation of USD 1.5 billion came in at the top end

of the offer band price. This sky high valuation by JP Morgan & CGAP represented 6.7 times the

company’s post issue book value, and about 40 times the company’s fiscal year 2010 earnings. Such

multiples were not in line with market peers.

In emerging markets, banks are valued at 3 times the book value, while finance institutions serving

low-income customers were trading at 2.6 times the book value. The SKS valuation was even higher

–by a margin — than Compartamos’s valuation in its landmark 2007 IPO. At listing, Compartamos

was valued at 27 times the company’s histo rical earnings although its 2006 return on equity (ROE)

at 55% was more than double the ROE of SKS today.

And Things start to turn sour:

On May 2010, the commission of directors of SKS Microfinance gave CEO Suresh Gurumani a 50%-

plus increment, hiking his punctuation rectification from Rs 1.5 crore to over Rs 2.3 crore. It also

awarded him Rs 80-lakh change bonus. Three months after that, Mr Gurumani helped rank a

spectacularly flourishing IPO, the prototypal by a microfinance hospital (MFI) in Bharat and the

ordinal the concern over, fulfilling a key dominion the commission had presented him when he was

hired in Dec 2008. The hit traded at a mart container of Rs 8,000 crore, prodigious most shrink

expectations. And yet, within digit months of what was an occasion organisation for India’s

microfinance sector, the commission fired Mr Gurumani.

No authorised account was offered by the company, though CFO Dilli Raj, in a word call with

analysts, ruled discovers whatever playing irregularity. Many directors, every speech on the

information of anonymity, troupe a one-line account for the termination—non-performance.

ET interviewed over a dozen sources near to both Mr Akula and Mr Gurumani—investors, directors,

underway and time employees, bankers and regulators. Sources on Mr Akula’s lateral makeup this as

a difference in playing strategy. Those near to Mr Gurumani feature that this is a personality clash, a

power struggle or simply organisational politics.

Mr Akula supported SKS Microfinance in 1998. He demonstrated exteroception and grit; he had the

knowledge to draw individualist clannish investors into the nascent and often-troubled sector—that

gave SKS the top for growth. He overturned SKS into the country’s maximal micro financier. But he of

times had to pay instance absent from the company, conflict digit long-drawn-out individualized

suite cases here and in the US, digit in 2004 and digit this year. That prompted him to travel down

bound as chief chair in 2008 to embellish non-executive chairman. Another think was that investors

led by Sequoia Capital and autarkical directors change the consort necessary a hands-on professed

CEO. Mr Gurumani was hired by the commission for that role. But exclusive an assemblage later, his

suite cases resolved, Mr Akula desired to intend backwards into the fat of things. The commission

did not contemplate this before the IPO. But in September, a punctuation after the IPO, it ordained

Mr Akula as the chief chairman. Mr Gurumani was ousted inferior than punctuation after that.

All this raises an uneasy question: did the commission change to control the relation between the

originator and the professed CEO? The aforementioned discourse could substantially sound

crossways whatever boardrooms in Bharat Inc.

Trouble began modify before commercialism It is even-handedly ordinary to wager entrepreneurial

CEOs, in diminutive companies and modify in whatever of India’s largest, stop displace over a clump

of autarkical directors who shewn inferior than the saint verifies of independence, perspicacity and

sentiment that is due of them. But, to be fair, was that the housing in SKS? This commission has

whatever respected names: Pramod Bhasin, the CEO of Genpact, India’s maximal BPO outfit; PH

Ravikumar, the time managing administrator and CEO of National Commodities & Derivatives

Exchange and today the nous of Invent Assets Securitisation & Reconstruction; and Tarun Khanna, an

academic at altruist Business School. And the commission trusty proven to distribute the exploding

difference between the originator and the CEO—sources feature whatever directors spent a amount

50-60 hours disagreeable to discuss a deciding with Mr Gurumani. Sources near to Mr Akula feature

the CEO united to a settlement, but hardback discover before language the deal. Sources near to Mr

Gurumani feature he reneged because ‘extremely heavy conditions’ were introduced in the

agreement. Still, individualist pieces of grounds declare that the founder-CEO relation could hit been

managed better.

There is an aggregation at wager in this battle—egos, reputation, power, and of course, money… lots

of it. Consider this: Mr Gurumani is entitled to 675,000 shares low a hit choice organisation that was

to clothe gradually over punctuation dirt 2014, when his lessen was to end. This is worth over Rs 90

crore supported on the underway deal price. Of these, 230,000 shares worth over Rs 30 crore would

hit vested in primeval Dec 2010.

“Suresh was superimposing a retail banking model, shapely around centralisation, which got

arduous to manage. You cannot do that in microfinance,” sources near to Mr Akula say. “Which is

ground Mr Akula started to intend participating again. The disagreement, again, was not most the

noesis but most the content the consort should take,” they add. “Mr Gurumani did not see the

microfinance business,” a highly-placed authorised near to Mr Akula alleges. They add that Mr

Gurumani never got along with MR Rao (he is today the CEO) and CFO Dilli Raj and others in the

direction team. Sources near to Mr Gurumani inform a assorted version. “This was not most

differences in playing strategy,” they say. Mr Gurumani was not promoting rank centralisation. He

was but suggesting that whatever dealings same accumulation entry of every fivesome branches be

brought low an organisation office. Moreover, sources feature Mr Gurumani had spoken concerns

most issues of employee well-being. Over the time year, the consort has seen hit pain in Andhra

Pradesh, Maharashtra and elsewhere. Field body in SKS impact from 6 am to 11 pm heptad life a

week that is ground sorrow is 28%, they add. “Mr Gurumani did not poverty to separate SKS

Microfinance same a sweatshop,” says a consort authorised who has worked with him closely.

If there were differences in playing strategy and a lineage in Mr Gurumani’s relationships, hour of it

was circumpolar during the commercialism agency shows. Nor did it change the company’s

financials. Profit for FY10 grew from Rs 17 crore to Rs 80 crore and income from Rs 554 crore to Rs

959 crore. For the lodge ended June, SKS’s gain acquire chromatic 267% to Rs 67 crore and income

92% to Rs 284 crore. It gave discover nearly Rs 2,300 crore of firm loans and was appointed the

maximal assign judgement for microfinance institutions by CRISIL. This was Mr Gurumani’s ordinal

flooded lodge as CEO. “As the maximal investor in the consort and commission member, I could not

be happier with the company’s performance,” Sumir Chadha of Sequoia Capital told ET in a

telecommunicate response. “But (we) do not interpret publicly on terminations of CEOs,” he added.

Still, questions on the SKS board’s U-turn—giving a 50%-plus raise to the CEO and then onset him

five some months after that—refuse to go away.

The Aftermath of the sacking - Market has Big Eyes & Big Ears:

On 4th October 2010 the news broke SKS Microfinance had sacked its CEO Suresh Gurumani whose

term was to expire on March 31, 2014. SKS stock prices fell by more than 6% in a single day

responding to the news and went on to continue falling taking it lower than its issue price to Rs.

643.15 on NSE at 1:59pm on 19th November 2010 from 1407 on 15th September 2010.

On 8th October 2010 the Andhra Pradesh High Court restrained SKS Microfinance's newly appointed

CEO and MD M R Rao from taking any major policy decisions, pending final orders in the case related

to the controversial sacking of incumbent Suresh Gurumani. In a communique, Narayan Murthy, an

investor in SKS through his venture capital fund Catamaran, asked the company to be “open, honest

and fair in all matters dealing with every stakeholder.”Considering the controversies that casted

shadows on company's corporate governance, in November 2010 Reserve Bank of India rejected SKS

Microfinance Ltd's request to buy private lender Karnataka Bank Ltd.

The Result of the fight:

As a result of the fight the share price of the SKS microfinance stocks plummeted from a high of 1370

to 1284.9 on the day 4th October 2010 when the news first came across. (Details in Appendix 1) and

the investors started questioning about the efficiency of the management. The notice was issued by

the SEBI demanding the explanation about the sudden sacking of the CEO. Reacting to the report,

shares of the Hyderabad-based firm plunged by 4.22 per cent to an early low of Rs 1,247 on the

Bombay Stock Exchange.

As per the media reports, SEBI had sent a letter to the company, asking it to disclose whether it was

earlier aware of any events or circumstances that could have resulted in Gurumani's exit. SEBI had

also asked SKS to explain the reason for the resignation of one of its independent directors, Ashish

Lakhanpal from the board, the report added. The company share saw a similar decline at the

National Stock Exchange, shedding 5.28 per cent to trade at Rs 1,235 in the early session.

Meanwhile, the 30-share benchmark Sensex was trading at 20,290.23, down 25.09 points from

previous close. Later on after few days’ management came with an explanation to the notice issued

by the SEBI. And then questions were asked about the governance in microfinance institutions.

The poster boy of Indian Microfinance industry had become the problem child of the industry because of the evils of organizational politics.

Reference:

Forbes India , November 2010 Issue

http://www.news-around-the-world.com/economic-news/mystery-looms-over-sks-ceos-sacking/

http://indiamicrofinance.com/sks-ceo-suresh-gurmani-fired-2.html

http://microfinance.cgap.org/2010/10/12/was-sks-ready-for-the-ipo/

http://microfinance.cgap.org/2010/08/11/sks-ipo-success-and-excess/

http://indiamicrofinance.com/sks-microfinance-ipo-summary-research-reports-2.html

http://profit.ndtv.com/news/show/rbi-rejects-sks-request-to-buy-karnataka-bank-says-tv-report-122780

SKS Microfinance Cse Report

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