SKS Microfinance: Poster Boy to Problem Child

Presented By: RaMaN Effect IMT Ghaziabad 12/18/2010

Contents
Executive Summary:................................................................................................................................ 3 The Principal agent theory and Organisational Politics: ......................................................................... 3 The Microfinance Story: .......................................................................................................................... 4 Foundation of SKS Microfinance: ............................................................................................................ 5 Business Model of SKS Microfinance: ..................................................................................................... 5 Awards and Recognition - Face of Financial Inclusion: ........................................................................... 6 IPO Success - Rs. 2.7 Lakh Cr Microfinance Opportunity: ....................................................................... 6 And Things start to turn sour: ................................................................................................................. 6 The Aftermath of the sacking - Market has Big Eyes & Big Ears: ............................................................ 9 The Result of the fight........................................................................................................................... 10 Appendix 1: ........................................................................................................................................... 11 Appendix 2: ........................................................................................................................................... 13 Reference: ............................................................................................................................................. 14

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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 Principal agent theory and Organisational Politics:

In political science and economics, the principalagent problem or agency dilemma treats the difficulties that arise under conditions of incomplete and asymmetric information when a principal hires an agent, such as the problem of potential moral hazard and conflict of interest, in as much as the principal ispresumablyhiring the agent to pursue its, the principal's, interests. Various mechanisms may be used to try to align the interests of the agent in solidarity with those of the principal, such as commissions, profit-sharing, wages, performance (including financial

statements), the agent posting a bond, or fear of firing. The principalagent problem is found in most employer/employee relationships, for example, when stakeholders hire top executives of corporations.

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Fig 1 : 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.

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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 RaMaN Effect Page 5

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. 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 RaMaN Effect Page 6

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 Gurumaniinvestors, 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 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 Indias largest, stop displace over a clump of autarkical directors who shewn inferior than the saint verify of independence, perspicacity and

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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 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.

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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. 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 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.

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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 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.

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Appendix 1:
Stock market price: Date 16-08-2010 17-08-2010 18-08-2010 19-08-2010 20-08-2010 23-08-2010 24-08-2010 25-08-2010 26-08-2010 27-08-2010 30-08-2010 31-08-2010 01-09-2010 02-09-2010 03-09-2010 06-09-2010 07-09-2010 08-09-2010 09-09-2010 13-09-2010 14-09-2010 15-09-2010 16-09-2010 17-09-2010 20-09-2010 21-09-2010 22-09-2010 23-09-2010 24-09-2010 27-09-2010 28-09-2010 29-09-2010 30-09-2010 01-10-2010 04-10-2010 05-10-2010 06-10-2010 07-10-2010 08-10-2010 RaMaN Effect Open 1040 1091 1180.2 1172.5 1160 1215 1173.55 1155 1163.6 1160 1170 1170.1 1230.35 1263 1297.4 1295 1292 1245 1295 1277.35 1345.2 1385 1402.6 1371.85 1390 1380 1391 1390 1372 1348 1385 1414.55 1379.4 1349 1370 1300 1261 1310.95 1292.2 High 1162 1188 1186.4 1172.5 1238.85 1219.7 1199 1194.9 1169 1173.95 1212.9 1301.7 1265 1312.8 1315.65 1308.4 1294.7 1310 1303.7 1358 1429.5 1436.95 1413.9 1410 1405.4 1394.95 1413 1395 1373.95 1409 1491.5 1421.9 1379.4 1377.65 1392 1324 1324 1315 1300 Low 1040 1076.25 1142.5 1150.25 1155 1168 1148 1152.1 1153 1151.75 1156.1 1170.1 1226.05 1240 1282.3 1280 1250 1243 1266.35 1277.35 1344 1368.5 1355.8 1371 1380.1 1368.1 1381.25 1358.25 1327 1348 1380 1367.15 1315.85 1340 1235 1241.65 1260 1291.05 1201.1 Close 1084.1 1171 1166 1168 1215.1 1172 1162 1162 1163 1152.25 1182 1223 1259 1286.7 1292 1285 1260 1286.5 1281.95 1338.25 1378 1407 1365 1396 1386 1389.95 1387 1360.4 1334 1375 1397.45 1372 1331 1363.1 1284.9 1271 1311 1310 1237 Adj Close 1084.1 1171 1166 1168 1215.1 1172 1162 1162 1163 1152.25 1182 1223 1259 1286.7 1292 1285 1260 1286.5 1281.95 1338.25 1378 1407 1365 1396 1386 1389.95 1387 1360.4 1334 1375 1397.45 1372 1331 1363.1 1284.9 1271 1311 1310 1237 Page 11

11-10-2010 12-10-2010 13-10-2010 14-10-2010 15-10-2010 18-10-2010 19-10-2010 20-10-2010 21-10-2010 22-10-2010 25-10-2010 26-10-2010 27-10-2010 28-10-2010 29-10-2010 01-11-2010 02-11-2010 03-11-2010 04-11-2010 05-11-2010

1277 1238.7 1273 1230 1220.05 1133 1083.3 1132.05 1168 1125 1060.25 1011.55 990 1026.05 998 1049.9 1028 1013.2 1001.1 1020

1299 1354.85 1282.5 1250 1225 1135 1164.3 1155 1168 1140 1098 1020 1040 1040 1050.4 1049.9 1036.2 1019.9 1019.8 1020

1224.95 1230.4 1217 1191 1108.45 1050 1071 1065.5 1090 1010.9 890 961 971.05 1001 995 1015 996 985 975.1 990

1227 1267 1242 1212 1133 1077 1140 1115.3 1107 1051.95 1002 991 1035.15 1021.5 1025 1015.5 999 988 1002 992

1227 1267 1242 1212 1133 1077 1140 1115.3 1107 1051.95 1002 991 1035.15 1021.5 1025 1015.5 999 988 1002 992

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Appendix 2:
NSE Script value of SKS Microfinance Ltd. For the period 16 September 5 October 2010

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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-report122780

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