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Society for Consumers’ & Investors’ Protection petition for investigation of SKS Microfinance and the microfinance industry in IndiaDr. Manmohan Singh
Prime Minister
Shri Pranab Mukherjee
Finance Minister
Shri Ashok Chawla
Finance Secretary
Shri R. Gopalan
Secretary (DFS)
Dr. D. Subbarao
Governor
Reserve Bank of India
Shri C.B. Bhave
Chairman, SEBI
Shri Santosh Macherla
Joint Director(TFC), CBI
Dear Sirs,
A lot has been written about SKS Microfinance and the microfinance industry in India in view of the recent happenings. Our endeavour is not to repeat what has already been said but to bring to the notice of the above authorities some interesting facts and the questions that the SKS saga has left unanswered so that care could be taken to ensure fair play for all the participants in the industry. Though the RBI has formed a sub-committee headed by YH Malegam to make recommendations relating to regulation of microfinance activities of non-banking finance companies (NBFCs), especially with regard to issues relating to borrowers’ interests, little attention seems to have been paid to protect the interests of investors.
Let’s first see how the financials of SKS looked just prior to the company raising a huge amount from the unsuspecting public through the IPO. The fact that most of the analysts have everything positive to talk about the company and its financials speaks volumes about their understanding of the industry and depth of the subject called accounting which only helped the cause of the company but at a huge cost to the investors at large. Those analysts are now hard to trace. The financials of the company are summarized as follows: The basis for the entire analysis is the secondary data as provided by the company mainly through its Red Herring Prospectus (RHP) as submitted to SEBI. SKS Microfinance Ltd. was incorporated in 2003 to take over SKS Society (Swayam Krishi Sangam), an NGO, and further equity was diluted to 5 newly created Mutual Benefit Trusts (MBT) with the object of promoting and enhancing the Social and Economic Welfare of Groups of Women belonging to the weaker sections of society. But most of the observers feel that the NGO has been converted into a company mainly to make substantial money from the capital market. The company sold its shares at Rs. 985 per share (highest price band of the book build IPO) through the recently concluded IPO. The investors feel cheated with which most of the investment analysts now agree since the price was kept way higher than what the fundamentals of the company warrant. The following facts adequately support the same and also demonstrate how promoters and those acting in concert with them made huge gains: 
The Book Value was Rs.160 and Price to Book Value came to 6.15 times against the industry norms of 1.5 (normal) to 3 times (maximum). The company has a very short history of 4 years for its financials and surprisingly the last 2.5 years have witnessed a quantum jump in its financial performance. (Annexure 1) Cost of acquisition to the Main Promoter comes to Rs. 41.97 per share only. ? Cost of acquisition to the PE Promoter comes to Rs. 78.80 only. Average period of Investment of Main Promoter and PE Promoter is not more than 4 years and Main Promoter gain comes to Rs.1723.79 crore on investment of Rs. 76.75 crore. And PE Promoter gain comes to Rs. 1607.37 crore on investment of Rs. 139.77 crore. (Annexure 2 ) Shares were issued to various investors during the period between 26th March 2009 to 19th January 2010 at Rs. 300 per share only. (Annexure 3 )Other income at Rs. 48 crore is substantial for FY09 as against the PBT of Rs. 124 crore and for half year ended Sept ’09 is Rs. 43 crore against PBT of Rs. 86 crore. This indicates that the other income had played a major role in boosting the profitability of the company. In the normal way, other income should not be given a PE of more than 10 which leaves the normal PE for the business income to reach a staggering 80. A PE of 80 by any standard is considered exorbitant even for most lucrative of businesses let alone a business that has social welfare at its core. Besides the aforementioned observations, the regulators need to find answers to the following questions:
The company (SKS Micro) was incorporated in 2003 to take over an NGO, namely, M/s SWAYAM KRISHI SANGAM (SKS). Was the takeover of the Society the main objective of the Company at the time of formation since no such information is provided in the RHP? An NGO is a non-governmental non-profitmaking organization and is supposed to work for social welfare or promoting some socially relevant cause. Was this sale permitted by the by-laws of the NGO Society? Who were the original founder-members of the Society? Under which Act was the Society formed and what was the date of its formation? What were the financials of the Society from the beginning to the date of sale of business? Normally, an NGO can sell its business to any other NGO/Society with an identical nature of business and objectives. Does it not mean that the purchaser of the business should also work with a no-profit policy? When sold, how was the price of business fixed? When sold, how were the proceeds from the sale of the business distributed between the members of the Society i.e. beneficiaries of sales proceeds? After the sale of the business, did the Society cease to exist or continue its activities in some other form? Was the Society exempted from income tax u/s 12AA at any time during its period of existence? Were the contributions to the Society at any point of time granted exemption u/s 80G of Income-Tax Act, 1961? Can inference be drawn to the fact that profitability of the business in the Society was undermined and gains/profits suppressed by the Society? Was any resolution passed in the General Body Meeting of the Society permitting the sale of the business? If so, provide the copy of the said resolution. While the business was purchased, was it purchased in toto or were only a part of the activities of the Society purchased?
The equity of the company was diluted to Mutual Benefit Trusts (MBTs). Who were the beneficiaries of these trusts? What were the sources of money that was lent to poor people? Please provide the details for the entire period of the Society’s existence. Was the money lent by the Society sourced as corpus of the Society or was it borrowed money?Page 73 of DRHP says: After several years of operations as an NGO, SKS Society with its inherent not-for-profit business model was limited in its ability to address the credit needs of the poor throughout India. Accordingly, SKS Society decided it would transfer its business and operations to us as of a newly incorporated Pvt. Ltd. Co. in 2003. Please provide the details of the following:
I. Whether the said transfer of business was for some consideration or without it.
II. How did the Society shortlist SKS for transfer of the business?
III. Were there any links between the Society and SKS or was there any relationship between the members of both the entities?
To control various mutual benefit trusts (MBTs) formed at the time of SKS, a new company named SKS Trust Advisors Pvt. Ltd. was floated on 10.11.2009 with a paid-up capital of Rs.1 lakh only (page 74 of DRHP mentions that this company was floated with the name of Utthan Tust Advisors Pvt. Ltd. which was subsequently changed to SKS Trust Advisors Pvt. Ltd. However, to the best of our information, no company in this name ever existed.) Please provide all the details of Utthan Tust Advisors Pvt. Ltd. such as the date of incorporation, place where incorporated, promoters, paid-up capital, directors, main objects, etc. What were the compelling reasons or circumstances that led to the change in directors of SKS Trust Advisors Pvt. Ltd to Shri Vikram Akula and Shri Ankur Sarin in March 2010? The company is providing rural insurance facility also. Which are the companies/policies etc.? Please explain whether MBT owns more than one Self Help Group (SHG) or SHGs itself have been renamed as MBT?
Thanks and Regards,
President,
Society for Consumers’ & Investors’ Protection (Regd)
New Delhi.
