Friday, October 29, 2010

Vikram Akula’s Dilemma – Profit Vs Non-Profit




“We have given the poor a chance,” said the CEO of SKS Microfinance in an interview to CNBC-TV18. You usually don’t hear such things from the CEO of a company that is going public. But then Vikram Akula is not your typical black-jacket CEO variety, he prefers sporting bright cotton kurtas, avoids jargons like “inorganic growth going forward”. He is more likely the type who eats organic rice probably grown in the most arid parts of Andhra Pradesh where SKS operates.

Vikram Akula flung to fame when he rescued the poor in the Telengana region from the exploitative tactics of local moneylenders. His idea was pure and his execution impeccable. Lend money to those who need it but can’t borrow. Since 1997, SKS Society, a not-for-profit organization, has been lending money as low as Rs 100 to a maximum at Rs 15000 to millions of people. In CK Prahalad’s parlance, SKS was targeting the bottom of the pyramid. Over the years, his business grew big. Very big. Big enough to help millions, big enough for politicians to wonder how he did it and big enough for South Bombay bankers to salivate. Now, SKS is India’s largest non-banking finance company, bigger than many govt and private banks, and has a portfolio worth 1 billion dollars.

So far so good. Now SKS wants to grow bigger and needs more capital. So Akula has brought his baby to the shrine of capitalism – the stock markets. SKS is offering 1.68 crore share to the public to raise Rs 1500 crore through an Initial Public Offer (IPO). Stock market pundits are all singing rah-rah about the uniqueness of the business model, the untapped potential of the microfinance industry and the top notch quality of management. True, SKS Microfinance is a kickass stock to buy, even if it is a tad expensive off-the-counter, but that’s not where the problem is. The problem is what Vikram Akula stands for or atleast stood for. The vision of what began as a noble social initiative whose objective was to cater to the financial needs of the poor in a sustainable (not profitable) and professional manner seems muddled now (Remember, SKS Society started in 1997 as a not-for-profit firm). So muddled that skeptics have a reason to questions Akula’s intention in the first place. Some reports say that the initial investment of the promoter was anywhere between Rs 24 to Rs 137 per share. Now, Akula and others have sold to investors at a whopping Rs 636 per share. That was just one-fourth of his stock options that fetched him 26 times returns.Frankly, it does not bother me so much that Akula personally got a great deal. Here was an entrepreneur who had an idea started a business, created value and cashed out when the opportunity arose.What bothers me is ‘why’ SKS Microfinance wants to access the capital markets, and ‘how’ it has transformed into a capital hungry leviathan that is seeking profits. More importantly, my angst is its eagerness to allow private equity players and other market investors such as Sequoia Capital to become part owners of the company. I am told when the issue hits the market; Sequioa will sell 10% of its holding.Don’t get me wrong, I hold no grudges against the Sequioas of the world, in fact, quite the contrary. They do a fantastic job finding the right business, fund it, watch it grow and sell for a profit. So their objectives are very clear.
But what is SKS’s objective? The larger question – Is the goal of a microfinance venture making profits? Vikram Akula, in an interview to CNBC-TV18, defended saying, “We believe that if we use the commercial approach you can actually raise more capital and disburse to more people. We have disbursed over last 5 yrs, 3.2 bn dollars (Rs 14,000 cr). We feel that this in fact is the best way to put most money into most hands of people.”

That’s one view, here is the other: The Financial Times reports that Muhammad Yunus, the Nobel Peace Prize-winning founder of Bangladesh’s Grameen Bank, has criticised the commercialisation of the industry, saying profit-oriented microlenders are little different to the loan sharks they once set out to replace.Meanwhile, I came across some more information that disturbed me. One more part owner of SKS, Unitus Holding, originally a microfinance funding company sacked its employees and unwound its microfinance operations after Vikram’s IPO plans got finalized. Some of its Directors, I hear, will directly gain in their personal capacity from the public issue, as promoters.
Frankly, I don’t know what is right or wrong. So I reached out to Deval Sanghavi of Dasra.Deval argues that all social businesses should not have a goal to make profits but instead reach out to a greater beneficiary base in a sustainable manner. “Unfortunately, it is difficult for these organizations to raise large amounts of philanthropic funding therefore encourage investment from for-profit investors who at times decrease the organization’s social impact by demanding a greater ROI. Therefore once these two parties for-profit investor and social business are brought together questions do arise in terms of motives. At that time it is really up to the management team and board to determine which path to take,” he says.I haven’t been able to make up my mind on which side is right. I’ll leave you to do that. But my bigger fear is the fallout of the SKS’ IPO, if it succeeds. Tomorrow, sensing this valuation game every (dare I say) shady real estate company in India, under the garb of a social cause, may float a microfinance company.
We run the risk of several wannabe Akulas putting up a farce of lending to millions of “unbanked” people, wait for the business to gain some critical mass, sell stake to an investor and walk away with a profit. None of this is against the law.
But isn’t there a moral dilemma here?