SKS Micro's IPO lands in controversy

31 Jul 2010, 0440 hrs IST,NYT News Service

SKS IPO Conterversy..................................................

An Indian company with rich American backers is about to raise up to $350 million in a stock offering closely watched by philanthropists around the world, showing that big profits can be made from small helping-hand loans to poor cowherds and basket weavers.

The company, SKS Microfinance, is one of the biggest players in the field known as microfinance, which involves loans, often as small as $20, that banks might consider too tiny and risky to bother with.

SKS was set up as what philanthropists call a “social enterprise” — a business based on the concept of doing well by doing good. And there is no question that the company’s 41-year-old Indian-American founder, Vikram Akula, and investors who include prominent Silicon Valley venture capitalists will do very well indeed from the IPO. Mr Akula has already privately sold shares worth almost $13 million, and he still holds stock options potentially worth $55 million.

The question is whether the social good will be as amply rewarded.

SKS Microfinance is not the first microlender to go public, and there has long been debate over whether social enterprises should be turned into giant commercial operations. Proponents of commercial microfinancing say the money raised can provide even more loans to the needy than relying only on charitable donations.

But the IPO for SKS, one of the field’s biggest stock offerings yet, has caused its own type of controversy. The disputes involve two charitable microfinance organisations that helped Mr Akula put SKS on its feet and financed it through its early days. It is not clear what will happen with the money those groups will make from the IPO.

At one of those groups — five Indian trusts that now hold the assets of Mr Akula’s original nonprofit version of SKS — two board members resigned in March over his plan to steer funds toward his original nonprofit group rather than granting them to many charitable entities.

The other nonprofit ensnared in controversy is a Seattle-based group called Unitus, which holds a stake in SKS that will be worth millions after the IPO. The group’s board shocked the nonprofit community this month by saying that all of the organisation’s 40-person staff would be laid off and that Unitus would no longer be involved in microfinance activities.

That stunned donors of Unitus, which was set up a decade ago specifically to support microfinance. As recently as June, a newly hired chief executive at the group had been discussing ambitious new projects with potential supporters, including the Bill and Melinda Gates Foundation.In charity circles, people wondered about the motives of the Unitus board members, at least four of whom had invested in SKS Microfinance themselves and thus would reap profits from the IPO.

“If Unitus is closing down, that shows what is the real result of this IPO,” said Muhammad Yunus, an economics professor who is considered the father of microfinance and has been critical of the SKS stock offering. “You are now encouraging the profit-maximising part, and the nonprofits are closing down.”

Joseph Grenny, the chairman of Unitus’ board and an SKS investor, declined to say what would happen to Unitus’ proceeds from the offering. Because Unitus is listed as a “promoter” of the stock offering, he said he could not comment without violating Indian law. “That’s all speculative at this point, anyway,” he said in a telephone interview.

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In India, there are also questions about how nonprofit assets will be handled after the SKS IPO. SKS’ roots lie in a nonprofit microfinance organisation, known as SKS Society, that Mr Akula set up in 1997. To help it grow faster, in 2005 Mr Akula set up a profit-making offshoot, SKS Microfinance, to attract commercial financing.

No one doubts that the money SKS Microfinance raises in the offering will enable it to make even more loans to needy applicants. As of March it had about 6.8 million borrowers, holding $624 million worth of microloans, making SKS among the biggest of the world’s 1,800 or so microfinance organisations. The controversy lies in the five trusts that served as the bridge between the original nonprofit SKS Society and SKS Microfinance.

When Mr Akula started the profit-making SKS Microfinance, virtually all of the company was owned by the trusts. Over time, as other investors came in — including the American firm Sequoia Capital and the Silicon Valley venture capitalist Vinod Khosla — the trusts’ stake was diluted to 15%

But the trusts still stand to benefit in a big way from the public offering. They are selling shares worth up to $42 million and will continue to own a stake worth as much as $175 million — collectively making them one of the biggest endowments in India.

A new, supposedly independent board was created last fall to oversee the trusts and the new wealth they will have. But that structure quickly fell apart.

After the board’s first meeting in March, two of the handful of directors resigned: Narayan Ramachandran, who previously headed the Indian operations of the investment bank Morgan Stanley, and Anu Aga, a prominent philanthropist and former chairwoman of Thermax.

Mr Ramachandran and Ms Aga referred requests for comment to the company. But several people close to the situation said the two had left over differences with Mr Akula — who at the time was not a member of the trust board — about how to spend money from the offering.

Mr Akula declined to discuss the trusts or other specifics relating to the IPO, citing Indian and American securities rules. Mr Akula has become something of a celebrity in India, and some people who know him — including his ex-wife, Malini Byanna — said he wanted to continue controlling the trusts and SKS Society because he has political ambitions in India.