What Should We Look for with the SKS IPO?
With the SKS IPO slated to hit the street by the end of July, we will have an opportunity to learn more about where the microfinance industry is headed. There will be some details which the IPO transaction itself will shed light on, but the most important questions about the microfinance industry will take some time. We should not rush to judgement.
The IPO will finally tell us where the price and valuation settled. A price at the low end might dampen investor enthusiasm. On the other hand, a valuation perceived to be a the high end might bring accusations of supernatural profiteering. Expectations about the price and valuation may drive the initial reaction. It will be very interesting to read carefully the reaction from the general public, opinion makers or policymakers to gauge broader perceptions of a changing microfinance industry within India. Microfinance may finally move in the public’s view from a development sector to a fully commercial enterprise. Another key issue is how smoothly the transaction is executed. If it moves through seamlessly with strong subscription this should be a sign that future IPOs for microfinance are possible.
But the most important and contentious issues about the IPO will take more time for us all to weigh carefully. It will be particularly important to see how the proceeds of several Mutual Benefit Trusts are used given the philanthropic purpose for which these MBTs were first created. This is something we may not know for several months or possibly even longer. Another feature that may take time to learn more about is how new transparency and governance standards applied to public companies affects SKS’s performance. And we will have to wait and see how the IPO affects the growth trajectory, expectations, and valuations of the broader microfinance industry.
Will the health of the microfinance industry be advanced? This is something we will have to look beyond the transaction itself into the months and years ahead.
SKS is doing a great work for improving the economic lot of the poor. It was reported earlier in the blog by Sriram how the promotors of the company have misused their position and appropriated themselves huge funds by way of ESOPs and selling the shares at a huge premium, bringing in people like Narayana Murthy of Infosys on the Board etc. I am afraid if the company is also gripped with the sense of greed but camouflaging it under the garp of micro-finance. The follwoing link is an interesting one on Corporate Social Responsibility and business. http://www.developmentcrossing.com/profiles/blogs/the-washington-post-e…
TEN REASONS WHY ONE SHOULD NOT INVEST IN SKS MICRO FINANCE IPO
1. Unethical business: The Company is charging interest around 40% p.a. on money lent to the poor and down trodden.
2. Unsustainable business model: The business model will not sustain in the long -run.
3. No commitment from the promoters: SKS’s founder and chairman sold his shares to Tree Line Asia Master Fund (Singapore) Pte for $12.9 million in Feb. this year.
4. Look at the salary of top executives :
Suresh Gurumani – Managing Director of the Company. The total monthly salary is Rs. 12, 50,000. In addition to the above, Mr. Suresh Gurumani was paid onetime bonus of Rs. 10,000,000, in April 2009.
Dr. Vikram Akula – chairman Rs 70.00 lacs p.a. In addition, ESOP amounting to Rs10.97lacs, totaling Rs 1.79cr p.a.
5. Mohd. Yunus says – “I get very worried when investment funds come to microfinance,” said the founder of Bangladesh’s Grameen Bank, which pioneered the industry by giving small loans to rural women to start their own businesses. “I don’t want to excite businessmen that there is profit to be made here,”
6. The IPO will make the promoters, and other venture capitalists including some P/E funds that have stakes in these companies’ millionaires. The hapless borrowers continue to live in abject poverty.
7. Government /RBI will not be mute spectators to the exploitation.
They are bound to regulate the segment. This will make the business un- attractive.
8. Financial inclusion initiatives taken by the public sector banks will marginalize the micro finance business. Do not buy the theories put forth by the BRLMs to sell the issue.
9. The average cost of acquisition of shares by promoters is less than Rs50/-The Company has limited period of history and no dividend payment record.
10. The Andhra Pradesh government has constituted district level ‘Task Force Committees’ (TFCs) to investigate the unethical practices of micro finance institutions in the state. The committees were constituted after the government received many complaints against the loan shark practices adopted by some leading MFI’s of the state.
IPO ANALYSIS: SKS MICROFINANCE LIMITED – MODERN DAY SHYLOCK – AVOID
Andhra Pradesh government cracks down on predatory practices of Microfinance Institutions
The Andhra Pradesh government has constituted district level ‘Task Force Committees’ (TFCs) to investigate the unethical practices of micro finance institutions in the state. The committees were constituted after the government received many complaints against the loan shark practices adopted by some leading MFI’s of the state.
I PO ANALYSIS:
The ultimate goal of microfinance is to enable the poor to build assets, increase incomes, reduce vulnerability to shocks and economic stress and improve quality of life by enabling better access to education and healthcare. The microfinance industry has grown at a rapid pace across the world and has created a positive impact in the lives of millions of poor people.
The Micro Finance Institutions, instead of providing credit at affordable interest rate, exploiting the situation and looking for a return on investments in excess of 30% p.a. The borrowers pay exorbitant rate of interest. Most of their income goes for servicing the debt with no savings. This kind of situation is no better than the one the poor borrowers had experienced with the traditional moneylenders. They also defeat the very purpose of establishing the Micro Finance Institutions.
Micro finance should not be viewed as a business venture where one can expect very high return on investments. Governmental and statutory regulations, including the imposition of an interest-rate ceiling, are bound to happen. This will adversely affect the operating results. More importantly, the sector, which sucks the blood of the poorest of the poor, (very high interest rates) does not deserve any support. The IPOS will make the promoters, and other venture capitalists including some P/E funds that have stakes in these companies’ millionaires. And the hapless borrowers continue to live in abject poverty. It is time that the regulators look into this ugly side of micro financing.
Despite the vast expansion of the formal credit system in the country, the dependence of the rural poor on moneylenders continues in many areas, especially for meeting emergent requirements. Such dependence in the case of marginal farmers, landless laborers, and petty traders and rural artisans belonging to socially and economically backward classes and tribes whose propensity to save is limited or too small to be mopped up by the banks.
Micro finance is the provision of financial services to low income clients, including consumers and the self employed that traditionally lack access to banking and related services. It is a movement whose object is to create a platform, for as many poor and near poor as possible, to have permanent access to an appropriate range of high quality financial services, including savings, insurance and fund transfers, at an affordable cost. Those who promote microfinance generally believe that such access will help poor people out of poverty. Microfinance is one of the tools that can reduce the suffering of people by financial services that enable the poor to use the existing knowledge and experiences.
In 1994, the RBI constituted a Working Group on NGOs and Self Help Groups (SHG). On the recommendations of the Group, the Reserve Bank advised that the banks’ financing of SHG should be reckoned as part of their lending to weaker sections and such lending should be reviewed by banks at regular intervals. As a follow up of these commendations, the RBI took a series of measures in April 1996 to give a thrust to micro-finance based lending. Currently, all loans by banks to MFIs are categorized as priority sector lending, that banks have to fulfill as part of their social obligation and regulatory requirement.
The interest rate applicable to loans given by banks to micro-credit organizations or by the micro-credit organizations to Self Help Groups/member beneficiaries is left to their discretion. Since the advances to MFIs are classifieds as priority sector advances, the applicable interest rate is around 15%p.a. However, the MFIs are collecting interest between 24% to 36% p.a. from the hapless borrowers. The Micro Finance Institutions, instead of providing credit at affordable interest rate, exploiting the situation and looking for a return on investments in excess of 30% p.a. Micro finance should not be viewed as a business venture where one can expect very high return on investments. RBI should put a cap on the interest to be charged on the end users, as most of their income goes for servicing the debt with no savings. This kind of situation is no better than the one the poor borrowers had experienced with the traditional moneylenders. They also defeat the very purpose of establishing the Micro Finance Institutions.
The RBI should also exercise greater control over MFIs, bring more transparency in their operations and derecognize the MFIs, which are known for bad corporate governance.
RISKS / MATTERS OF CONCERN:
SKS has limited operating history and the fast growing and rapidly evolving business make it difficult to evaluate the business and future operating results.
The company has no dividend history.
The report of the audited financial statements for the year ended March 31, 2009 records statements that there were delays in the deposit of undisputed statutory dues to appropriate authorities and there were instances of fraud on the Company by employees.
Governmental and statutory regulations, including the imposition of an interest-rate ceiling, may adversely affect the operating results.
The promoters/share holders are being profited at the cost of the hapless poor, down trodden and other weaker sections of the society. Unethical and unsustainable business model. The initiatives taken by the Public Sector Banks – for financial inclusion will make the presence of MFIs in rural areas irrelevant in the next couple of years. Even otherwise government will not be a mute spectator to the exploitation. Government is bound to regulate the interest rate in favor of the beneficiaries, which will make these kind MFIs redundant. AVOID.