Interesting Events Before the SKS IPO of July 28th 2010!

Dear Colleagues

During March – June 2014, Prof Sriram {formerly of IIM (A)} raised several issues including corporate governance at SKS Microfinance Limited (SKSML). Yet, the RBI and SEBI did NOT take necessary action. In fact, in An Idea Which Went Wrong: Commercial Microfinance in India, forthcoming, August 2014, I reproduce an e mail sent by one of India’s most client sensitive and brilliant financial sector experts, Late Shashi Rajagopalan. The mail clearly shows that the regulators and supervisors and many Indian and global microfinance experts were made aware of the presence of malpractices/issues raised by Prof Sriram in an EPW article and corroborated by some of us. Yet, sadly no serious action what-so-ever was taken until the crisis just wiped out Andhra Pradesh from the Indian microfinance landscape!

SEBI, in fact, was unresponsive and refused to entertain any feedback on corporate governance in an official sense! However, when I (informally) spoke to their middle level officers at SEBI (in anonymity) in July 2010, before the SKSML IPO, two reasons was given by them regarding their lack of knowledge about the issues/malpractices raised by Pro Sriram. First, they feigned ignorance because microfinance was apparently ‘new’ and that they did not have the requisite domain knowledge. One can hardly accept their argument because Prof Sriram’s article was in the public domain, especially through a reputed journal like EPW (Commercialization of Microfinance in India: A Discussion of the Emperor’s Apparel by Prof. M. S. Sriram, Economic and Political Weekly (EPW), June 12, 2010 – Vol: XLV No: 24) . Second, they claimed the IPO was a smaller one that did not merit significant attention (that the SKS IPO turned out to be moderately huge even by normal standards is another story).

Also, both the RBI and SEBI had received my paper on “Corporate Governance at SKSML”, which clearly provided additional empirical evidence for Prof Sriram’s assertions. And given that one of RBI’s deputy governors also sits on the SEBI board, I just cannot fathom as to how and why the regulators ignored the key issues regarding corporate governance in microfinance, especially because even the media had started highlighting them. Please see several papers by well known senior journalist, M Rajshekhar of The Economic Times...

1)      http://articles.economictimes.indiatimes.com/2010-03-31/news/27591101_1_sks-microfinance-vikram-akula-ashish-lakhanpal;

2)      http://articles.economictimes.indiatimes.com/2010-03-08/news/28460321_1_mfis-microfinance-institutions-labour-trouble;

3)      http://articles.economictimes.indiatimes.com/2010-02-16/news/27587254_1_mfis-priority-sector-indian-microfinance

4)      http://economictimes.indiatimes.com/opinion/policy/disciplining-the-mfis-adopting-right-regulatory-framework-to-be-crucial/articleshow/6221439.cms

5)      http://articles.economictimes.indiatimes.com/2010-03-15/news/27589507_1_vikram-akula-suresh-gurumani-sks-microfinance

6)      http://articles.economictimes.indiatimes.com/2010-08-13/news/27579870_1_unitus-equity-fund-microfinance-organisations-profit

OK, Let bygones be bygones but whether the regulators and especially, SEBI have learned from this experience is a key question that begs an answer! We need to know if there are safeguards NOW in place now to protect the money of retail investors! The erosion in share value for SKSML’s investors has undoubtedly been huge and going forward, SEBI and RBI must offer a guarantee that they will not let enterprises with a controversial track record and huge inherent/unknown risks go through an IPO, that could, in the long run, impact small retail investors! 

Warm Regards

Ramesh