SKS IPO Plans Spark Debate

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SKS Microfinance, India’s largest MFI is planning to raise over Rs. 1000 crores ($225m) through the sale of 16.8m equity shares, as reported by the Economic Times. Per the IPO prospectus, Sequoia, Sandstone Capital and Kismet Capital Advisors replace SKS founder Vikram Akula as the chief promoters. This follows a RBI directive requiring a minimum 12% capital adequacy ratio (expected to become 15% in 2011) for non-banking financial institutions. A number of other MFIs, including Spandana, Share Microfin, Bandhan, BASIX and Equitas, are also believed to be making plans to go public based on the success of SKS’s IPO.

This news has sparked off a debate on whether a public company can prevent financial objectives from superseding the social objectives. Mohammad Yunus, founder of Grameen Bank and Nobel laureate, raised his concerns about this news in an interview with Microfinance Focus,

This is coming from the banking side, from the profit maximizing side and I am opposed to that. If they do it, I cannot stop them but I would encourage genuine Microcredit programs. The concern is that when you put an IPO, you are promising your investors that there is a lot of money to be made and this is a wrong message. Poor people should not be shown as an opportunity to make money out of. If you have a new kind of IPO where you can say that you can help people get out of poverty, it is a social business and if you invest here you never get any return from this then it is good.

Olivia Donnelly of Shivia Microfinance also raised concerns about increasing valuations and the lack of regulations in an interview with the Financial Express,

The job of microfinance is to alleviate poverty, so the question to ask is: who’s going to benefit from the IPO? MFIs are ignoring their social mission. They have a duty to educate their clients and not lend money for buying a TV or pay dowry just to add to their loan books. It’s the wrong path to take. It’s sub-prime all over again.

People on the other side of the debate point to the lack of other options for raising enough capital to match the rapid growth of microfinance in India and maintain the capital to risk ratio mandated by the RBI. According to Vijay Mahajan of BASIX, “For specific MFIs who have crossed a certain size an IPO becomes inevitable, because you can’t raise Rs 300-400 crore from private equity in one shot”. Samir Chaddha of Sequoia also believes that the IPO will increase visibility and trust for the MFIs and overall improve accountability.

This is a similar debate to the one spawned by the IPO of Compartamos back in 2008, which was covered in an op-ed by Prerna. While it is hard to predict the eventual impact of the SKS IPO, it does represent a coming of age for the microfinance industry in India and should significantly increase the number of people impacted by it.

Please post your views on this debate in the comments section.

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Shivam Srivastava