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.
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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
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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 companys 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 companys post issue
book value, and about 40 times the companys fiscal year 2010 earnings. Such
multiples were not in line with market peers.

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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 Compartamoss
valuation in its landmark 2007 IPO. At listing, Compartamos was valued at 27
times the companys 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 Indias 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 terminationnon-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 Akulas 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 sectorthat gave SKS the top for growth. He
overturned SKS into the countrys maximal micro financier. But he of times had
to pay instance absent from the company, conflict digit long-drawn-out
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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 nonexecutive 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
Indias 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, Indias 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 CEOsources 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 battleegos, 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
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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

centralisation,

superimposing
which

got

retail

arduous

to

banking
manage.

model,
You

shapely

cannot

do

around
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 Gurumanis
relationships, hour of it was circumpolar during the commercialism agency
shows. Nor did it change the companys 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, SKSs 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 Gurumanis ordinal flooded lodge as CEO. As the maximal investor
in the consort and commission member, I could not be happier with the
companys performance, Sumir Chadha of Sequoia Capital told ET in a
telecommunicate response. But (we) do not interpret publicly on terminations of
CEOs, he added.

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Still, questions on the SKS boards U-turngiving a 50%-plus raise to the CEO
and then onset him five some months after thatrefuse 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 19 th
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.

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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 4 th 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.

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Reference:
Forbes India , November 2010 Issue
http://www.news-around-the-world.com/economic-news/mystery-looms-over-sksceos-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-report122780

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