8/3/2019 Microfinance India Summit 2011 - From Despair to Hope

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10 INDETAILWEDNESDAY, DECEMBER 14, 2011, DELHI WWW.LIVEMINT.COM

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GOVERNANCE

LESSONS FROM SKS

Why is SKS Microfinance Ltd in the news for all the wrongreasons? Why did an organization that had a chance toredefine financial inclusion fritter it away? Every time we thinkabout it, we come to the painful conclusion that it is about thearrogance of governance. Failure driven by arrogance.

A look at the chronology of events makes it evident. First, thecompanys initial public offering (IPO) last year sent all the

wrong signals. Founder Vikram Akula and senior management,including M.R. Rao, Suresh Gurumani and Dilli Raj, sold alltheir holdings in the company acquired through stock options.The principal promoter and top management did not retainany financial stakes in the organization. They werent botheredabout what signals they would send to potential investors. Theyonly committed to lock in their future stock options (ifexercised). There was no skin in the game. But the investorsbought on blind faith, like the private equity firms before themdid.

The company made an allotment of shares to CatamaranManagement Services Pvt. Ltd, a venture capital firm set up byInfosys co-founder N.R. Narayana Murthy, at a price which was

less than 50% of the price discovered by the market a few weeksearlier when Akula signed agreements to liquidate all hisholdings to Singapore-based Treeline Asia Master Fund PteLtd. The top management and other employees signedagreements to liquidate their holdings at a similar price acouple of weeks later. This was to the detriment of the interestsof the pre-IPO shareholders, which included the Mutual BenefitTrusts (MBT) representing poor women borrowers. Theresolution was passed in a hurriedly calledat five daysnoticeextraordinary general meeting, which can be termednothing but arrogance of governance.

The IPO document promised that, among other things, therewould be an advisory council (chaired by Narayana Murthy,and, with Akula as a member as per the shareholdersagreementnot disclosed in the prospectus), for a period of 24months, to advise on a) managing the next phase of growth; b)best industry practices to benchmark; c) corporate governancepolicies and practices; d) improving disclosure standards; e)risk management and internal control; and f) best internationalaccounting practices (page 124 of the prospectus). It appearsthat this council never met. Even if it met, it is clear that it has

been fully ineffectual.Soon after the IPO, chief executive officer Gurumani was

eased out. There was much written in the press about thedifferences between Akula and Gurumani, the principal onecited being of Gurumani wanting to diversify and grow intoareas which Akula thought was a drift in the companysmission. Gurumanis departure meant one of the faces of theIPO was no longer there. It did not matter to the company whatthe market would make of this move.

And now the easing out of Akulafrom the board on the grounds thatGurumani should have stayed on!The board wants to diversify into

activities other than microfinance and become a universalfinancial services provider for the rural poor. Apparently, Akulastood his ground and was grounded.

A company that is listed and has investments from diversesources continues to give out signals that it can do what it

wants. As the stock price keeps tumbling and investors bleed,there is no transparency on the severance deal with Akulathechief financial officer tells a newspaper that it is not materialcompared with the overall expenses of the company!

What are the lessons for governance here? If we look at theboard of SKS, on paper, it is a dream board. A good number ofindependent directors, representatives of institutional investorsand a Harvard University professor whose specialization iscorporate governance. Expectedly, there are representatives ofthe largest investors and promoters. But no representation forowners-cum-beneficiaries, the MBTs that represent the poorcustomers who are also shareholders of the company. Venturecapitalist Vinod Khosla, with a greater share than Sidbi, is alsonot represented.

What is common to all the members of the boardincludingthose who were but currently are not on the board? None ofthem have any personal stakes of significance. Therefore, if themarket price crashes, they do not lose any of their personalmoney (except Tarun Khanna, who did put in his personalmoney as an indication of his commitment). All of them areeligible for options, so they benefit from any upside. Undernormal circumstances, this is supposed to be a good enoughincentivebecause the growth parameters and rewards arealigned. However, when it comes to a crisis, the downside ofthe individuals is zero. This is not the case with just SKS, butseveral other microfinance institutions in the country who werefunded by grant money that was converted into equity.

Now, we can see what a governance deficit means. We alsosee that we could draw up a list of qualifications for agood-looking board. SKS had it. So did Satyam ComputerServices Ltd. So did Global Trust Bank Ltd (GTB). But that wasnot sufficient for them to get good governance. While in thecase of Satyam and GTB, the issue was of management takingthe board and the shareholders for a ride, in the case of SKS,that is not the issue. The board has been active from thebeginning, but it does not seem to have a clue about theimplications of its activism. No clue about the politicalsensitivity, client sensitivity and implications for the companysimage. It seems to have taken the investors for granted.

Is that similar to the behaviour of the United ProgressiveAlliance in its second term in power, when it has been acting asif there were no opposition party, no electorate and noaccountability. Well, these are questions to ponder.

M.S. Sriram is an independent researcher and consultant anda former professor at Indian Institute of Management,Ahmedabad.

MS SRIRAMEXPERT VIEWRespond to this column at feedback@livemint.com

COLUMN

THE AGGREGATE STORY: HANGING ON

FROM DESPAIR TO HOPE

0

20

40

60

80

100

200607

31.4

62.5

93.9

200708 200809 200910 201011 A ve rag e lo an/c us tom er 2 00 8-0 9 2 00 9- 10 2 01 0- 11

Growth in customers(in million)

The growing client base(in million)

MFIsBanks-SHG*

*Self-help groups

#

Regional rural banks; **Primary agricultural credit societies

Adjusted for overlapTotal

Increase in loans(In

R)

8,000

6,000

4,000

2,000

0

4,120

5,190

4,570

6,060

4,900

6,610

MFI customerSHG member

March 2008 March 2009 March 2010

Total 130.7 Total 143.9 Total 161.5

The aggregate story of microfinance suggests that all is well with the sector. This is largely because the

developments in Andhra Pradesh will begin to show up in the numbers only in the current fiscal. Pointing this

out, a report by ACCESS Development Services says that with a raft of new regulations in place, the outlookfor this sector, which caters to 93.9 million customers, should improve sooner, if not later. Mint details the

key findings of the Microfinance India-State of the sector report 2011.

10.00

38.00

48.00Total

14.1

47.1

61.2

22.6

54

26.7

59.6

86.3

44.9

56

70 71

76.7

Growth percentage 2010-11

4.9%

8.8% 8.0%17.6%

76.6

MFIclients 14 22.6

Commercial banks(including RRBs#) smallloan accounts 41.00 39.2 45.2

PACS** borrowers(small, vulnerable) 28.5 28.7 30

SHGmembers 47.1 54 59.6

26.7

Graphics by Sandeep Bhatnagar/Mint

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