This high-profile microfinance company has sacked its CEO, under a shroud of secrecy. The bigger question is whether these aggressive, for-profit organisations should be allowed to play havoc with the finances of the rural poor
A week after SKS Microfinance shocked the corporate world by sacking its CEO, the company's image as the messiah of India's rural poor is suffering from a steady erosion. One of the main reasons for SKS's damaged public image is that the company's board of directors and the glittering list of SKS shareholders have chosen to maintain a stunning silence over the way the CEO was sacked and also the swirling rumours regarding how the company was run.
The Securities and Exchange Board of India (SEBI) has done well this time to react quickly and publicly in asking the company to explain its action. It has also done well to let it be known (through media leaks) that it is not satisfied with the answer. We learn that one reason for SEBI's quick response could be the fact that before the IPO (Initial Public Offering), some of its shareholders had complained about a preferential offer to a select group, which was later dropped.
The silence of SKS Microfinance presents an interesting case study about perceptions of governance and accountability at the board level. While there is no indication of a financial scam like Satyam, here is another case, where neither a glittering list of internationally renowned corporate achievers (Vinod Khosla, NR Narayana Murthy) and top funds such as Sequoia as shareholders nor a board packed by representatives of private-equity funds, has been able to prevent controversial and confrontationist action without explanation.
Surely the board realises that unceremoniously sacking a CEO without explanation, is a different cup of tea from maintaining a dignified distance from Vikram Akula's messy divorce and prolonged custody battle, details of which are splashed all over the Web. And if they were convinced that the CEO needed to be sacked within months of an IPO, they need to explain to the retail shareholders who are not as privileged. When asked, Mr NR Narayana Murthy sent me this text reply, "since the issue is in court, I would not like to comment on this. I am also not aware of what exactly happened for this result".
On whether he was consulted before this controversial decision he said, "It is not proper to comment," at this stage when the issue is still sub-judice. It may be recalled that Mr Narayana Murthy's venture capital company acquired a substantial stake in SKS Microfinance just before the IPO at Rs300 a share. This investment certainly enhanced the premium that the company could command and also increased retail interest in the issue significantly. We contacted the two public relations agencies that handle SKS's media relations - Adfactors and Sampark - and both were doubtful if the company would speak. Interestingly, it is not clear how the issue remains sub-judice when the court has decided the issue, ordered Gurumani to remain on the board and asked the company to seek general body approval for its action of sacking the CEO.
Since the company and its big shareholders are keeping mum, here are a few details we have pieced together about the sudden sacking of Suresh Gurumani. It is generally agreed and believed that the central issue was a personality clash between Vikram Akula, who wanted to take charge of the company once again, after winning the protracted custody battle for his son. Meanwhile, Suresh Gurumani, who had powered the growth of SKS Microfinance over the past two years, ensured a successful IPO, helped bring major shareholders on board and was even becoming the face of Indian microfinance (due to Akula's long absences from India), wasn't quite willing to give up. The flashpoint allegedly was Akula's objection to Gurumani trying to centralise processes. Whether centralised processes are the better thing to do will be evident in the coming years, especially when microfinance companies are chasing India's rural poor in exactly the same manner as they and private banks had chased the urban poor with expensive personal loans and credit cards.
It appears that Gurumani was all set to resign quietly. There was an understanding on his severance deal, including a three- to six-month gardening leave (when he cannot join a rival firm), 1.25 lakh stock options and payment of his salary for a year (a stunning Rs2 crore a year in a microfinance company). This was apparently negotiated by directors PH Ravikumar, Sumit Chhada, Paresh Patel and Vikram Akula. However, we learn that the lawyers who drafted the severance deal inserted so many onerous conditions that Gurumani decided to reject it. He was then threatened with sacking and told that it could lead to forfeiture of his options.
Source say that Gurumani's employment terms specified that if he was terminated 'with cause', he would lose all his stock options, but if the company couldn't come up with reasons to sack him, he not only walks away with his stock options (valued at around Rs300 crore at today's prices). Given this deal, we learn that the company tired to find a 'cause' for sacking Gurumani. For a while, they toyed with the idea of questioning his frequent visits to Mumbai, where his family continued to live.
Amazing as it may seem, the high-profile SKS Microfinance was headed by two people who spent very little time in Hyderabad. Akula was in the US almost every alternative week for his divorce and custody battles; in between he even found time to romance a well-known actress. We learn that some sensible voices at the board rejected the idea of investigating Gurumani's Mumbai trips too much, because there could be equal questions about Akula's US visits.
As things stand, some dirty linen is bound to be washed at the general body meeting. But, it is unlikely that Gurumani will find the numbers to back his continuance at SKS Microfinance as CEO. Gurumani also has no option but to fight, since SKS's action in sacking him has already made his employability an issue and he will want the best exit deal. His short stint at SKS Microfinance leaves him a very rich man who has little to lose. On the other hand SKS Microfinance and the microfinance industry itself has a lot more to lose. The fracas is just the trigger that was probably needed for many of us to question whether microfinance companies need to be reigned in and investigated before they create a moral hazard among India's rural poor by plying them with onerous loans that they cannot repay.
Maybe it is time the Reserve Bank of India woke up to what Mohammed Yunus, the father of microfinance, has been saying about aggressive, for-profit microfinance companies and their operations.
Yesterday we had reported on how SKS Microfinance had sacked its CEO under a shroud of secrecy. We reproduce a letter below (verbatim) we have received from Malini M Byanna, Vikram Akula’s former wife
Dear Sucheta Dalal,
Thank you for having the courage to write such an article, (Moneylife note - please see: http://www.moneylife.in/article/4/9883.html) finally exposing the truth about Dr Vikram Akula et al and the "corporate governance" issues, or more accurately "power and control" issues, that have been long-standing, dating back to our separation and divorce, which was initiated by our then 8-month-old son being abducted in Chicago, Illinois by his father, his father's family, and members of his company in an effort to preclude me from attending a previously scheduled SKS Foundation board meeting during which I was going to call for formal resolutions to be passed such that SKS Foundation and SKS Education would be under my direct management and purview and SKS Microfinance and SKS Technologies under his.
I had called for the same due to stark differences in the legal, ethical, and fiscal management of the international development company that Dr Vikram Akula claims to have founded, which in fact was established in the Fall of 1999 subsequent to our engagement, with me assembling a Board of Directors for Navariti, Inc., later SKS Foundation, at a time when SKS Microfinance was not flourishing and the so-called founder was ready to pack his bags and move back to the United States.
Moreover, (on) the initial seed money that Dr Vikram Akula claims in various media articles that he and his family single-handedly raised from 350+ individual donors... they were in fact guests attending our lavish $80,000 wedding, primarily paid for by my parents, during which we asked for donations to Navariti, Inc., later SKS Foundation, in lieu of wedding gifts.
Our international development company initially operated out of my parents' home in Schaumburg, Illinois where we later resided as husband and wife, with said donors listed in SKS' 2000 Annual Report which can be found on the Web. See also SKS Foundation Annual Report 2001. Further, Dr Vikram Akula continues to take credit for and reap the benefits of the ideas, intellectual property, and sweat equity of countless individuals who helped take him to the "top of the mountain" because he had them convinced that (he) only had noble and altruistic motives, only for him to push them off the cliff if they dared challenged or opposed him or as and when they no longer had any utility or purpose, myself included.
Said ideas, intellectual property, and sweat equity include but are not limited to the following:
(1) Replicating SKS Microfinance in the 100 poorest districts of India by and through a non-banking finance corporation wherein the beneficiaries would be the largest shareholders, which was my inspiration
(2) The Smart Card project and related software and implementation developed by a McKinsey Consultant with a grant by CGAP of the World Bank, which was the inspiration of SKS Microfinance's former Chartered Accountant, and
(3) The SKS Education and Nutrition Program, for which I had secured a $300,000 earmarked grant from I2 Technologies, which was illegally dipped into while I was abroad without the knowledge and consent of the SKS Foundation Board to cover SKS Microfinance expenses because said program had been bankrupted by its so-called founder by and through unnecessary and wasteful expenditures in furtherance of his political aspirations.
Finally, I wanted to correct some factual errors in your report in that Dr Vikram Akula and I divorced in December 2002 after a protracted 14-month custody battle following the return of our son into my custody, care, and control, just 5 days after he was abducted over Columbus Day Weekend 2001 in a plot and a plan that was hauntingly similar to that which was exacted over Columbus Day Weekend 2009, but this time in India where Dr Vikram Akula, family, and company wield tremendous power and influence due to their money, stature, and political connections. Further, custody has never been disturbed and was, in fact, re-affirmed in August 2005 subsequent to a 604(b) best interests of the child evaluation, and the Family Court of Hyderabad's order granting Dr Vikram Akula guardianship of our son is only interim in nature and is currently under direct appeal in the Supreme Court of India. Therefore, Dr Vikram Akula has not by any means won custody of our son, either in India or in the US, as our case is still pending and (is to be) resolved in both countries.
Thank you and God bless,
Malini M Byanna
(The Former Wife)
Borrowing against gold is becoming more popular as the yellow metal’s price reaches for the stratosphere and Indians lose their inhibitions over pledging their family heirlooms as collateral. Is it safe to do business with these gold-loan companies?
In the previous part of this two-part series, we examined how loans against gold gained popularity (http://www.moneylife.in/article/78/9891.html). We now examine the revenue models of these gold-loan companies.
The biggest advantages for a gold-loan company are the following:
1) The hefty interest they can charge on these loans. The illiterate farmer has no other place to go and it was an opportunity for these companies.
2) They operate at huge margins - sometimes as high as 20%.
3) They offer very short terms of lending and they can ask the borrower to repay/give more assets or auction the securities (and in auctioning also there are so many fraudulent activities like not giving proper notices to the borrower/imposing very high penalty rates/taking the pledged ornaments in auction through people known to them, the list goes on).
4) No elaborate documentation involved. Just a promissory note and an application form.
5) Safe custody of documents/securities was easier (as they were just bundled in a cloth bag and kept with the name of the borrower tagged to it inside their strong room. And today a share broking company has to keep its shares and clients' shares separately - these gold loan companies have no such norms).
6) Normally, there are huge increases in market rates of assets pledged resulting in heavy gain for lenders due to the high margins while granting a loan.
7) These companies adopted intricate networks for easy reach, coming across as a "saviour" for the local people.
While banks thrived well and succeded in banking as they started other loans like cash credits, term loans by lending to industrial and trading activities, the small NBFCs (non-banking financial companies) and gold financing companies could not do it in the organised sectors. They still continued lending against ornaments to their existing client base and survived. When the liberalisation process started in India, these companies could see a silver lining for survival and waited patiently for the banks to diversify. Along with the banking reforms that were implemented due to the intervention of the Reserve Bank of India (RBI), these companies providing loans against gold started an active campaign for their comeback not in any traditional growth areas, but for the same old "loan against gold ornaments" category. These companies confined their operations to local districts (or maximum to their states) to float in the turbulent market, so that they would be well-poised to reap the benefits of any possible recovery in the market.
And now we see some of the companies trying to reach out to a pan-India audience, with branches at key centres. It can be seen that all these centers will be middle- and lower middle-class dominated areas. They are coming up with massive advertisements to attract customers. These companies are trying to raise money from the public both by way of debt and equity.
Some of them want to come out with initial public offerings (IPOs) to ride the current market highs and some are raising funds through private equity placements.
Even compared to sectors like real estate, these gold loan companies are finding it easier to attract entities for equity participation or equity lending.
Ultimately these lenders are in it for short-term returns and are not long-term players in this market. Gold loan companies are sure that none of their FDs or bonds will be rated. And same is the case with their deposits. Hence they are taking deposits from the public through the same way they used to collect earlier. As the cost of deposits has fallen down over a period of 20 years today, they are able to garner deposits @ 15% pa (as against the earlier 24%) and are lending at 24% to 30% pa. These costs may not be transparent as they will have appraising charges, processing fees on a quarterly/half-yearly basis, safe custody charges and so on.
These monies are taken for a term of 1 to 5 years and they also borrow from private moneylenders and from some banks against securities. The pooled money is lent against ornaments at exorbitant rates where they have at least 10% gross margin. Their operating cost is very low as they operate from ordinary places; thereby saving on overheads and the staff cost is not at the market level. The people employed are not qualified professionals. Thus they are able to get a huge profit margin and have started approaching the urban/metro sector population, using the latter's greed for retail assets and up-market living style.
Is it safe to deposit money with these companies?
No, for the following reasons:
1) They have no regulator. Though they say that they are regulated by the RBI, the grip on these companies by RBI is too weak. They are under the ambit of NBFCs; depositors should not forget the tough time they had during the days when NBFCs were giving out very huge rates of interest and incentives for mopping up deposits and all of a sudden the bubble burst. Anyone paying more than 200bps (around 10 % now) is to be avoided.
2) These companies have no asset backing. They do not have any fixed assets to floating assets like raw materials and work in process. They have only the money raised from you and from other sources and at any time of downfall there is no asset base cushioning for them.
3) They do not have a long-term plan to diversify into other areas of business and unless there is diversification in related areas in a financial service company, growth cannot come about. Hence they are short-sighted and want to make use of the sunshine now.
4) Their business model is just dependent on a single metal and the vagaries in price of this single asset, gold, will affect them both ways to a larger extent.
5) The deposit guarantee schemes given by the government will not apply to the deposits made with these gold loan companies.
6) Due to cost constraints, they operate from tiny residential areas; keeping a watch on them will be difficult.
7) There is no transparency in their deployment of funds raised as many are not listed companies or fall under the purview of any regulator like SEBI or IRDA.
And what about using them for raising loans?
Invariably, you will be requested to deposit some money or pay a rate of interest based on the amount funded. The usual margin they have is from 25% to 40%. And the amount you get in hand plus the interest you are going to pay will be a huge burden on you. Since these are considered as short-term loans, you need to close them on time or otherwise again pay through your nose to get them rolled over. The EMIs are structured in such a way that the main portion of it goes to interest in the initial period (though they are short-term loans). As a result you will be in a position to lose the ornament and the replacement cost will be higher for you with the cost of the yellow metal going up.
Hence investors are advised to exercise utmost caution while dealing with these companies. It is time that they are screened properly by the regulator and their dealings are made more transparent.
(The author is a management and financial consultant and can be reached at [email protected])