Was SKS Ready for the IPO?

This week, as I met several social investors in the Netherlands, inviting them to provide subordinated debt to Cashpor, a nonprofit MFI in North India, on whose Board I volunteer as Vice Chair, the discussions invariably veered towards SKS and its spectacularly successful IPO. What are its commercial, ethical, and regulatory implications?

It would be unfair to start without first acknowledging the tremendous achievement of SKS in pulling off a truly remarkable feat. Having known and served a very young and nascent SKS as a banker since 2004 and closely followed its growth, there is even a sense of pride in its achievement. But of course, that doesn’t take away from any of the uncomfortable questions surrounding it.

Without repeating those questions or proffering a not-so-original perspective, it may be interesting to instead look at why being a listed company for an MFI may be a far bigger practical challenge than ‘simply’ getting listed. It’s particularly relevant now, as the next chapter of post-IPO SKS saga is being scripted, very unfortunately, as a courtroom drama.

This is not the first time in the history of Indian microfinance institutions that the Board has sacked its CEO nor will it be the last. Basix, one of the most respected MFIs, has had to part ways with its CEOs in the past, more than once. Though being Basix, it perhaps handled it in a very different manner. Without getting into propriety of the action of SKS’s Board in sacking its CEO, the events unfolding thereafter certainly raise the big question of public scrutiny that a listed company is subject to and how well the MFIs, even a trailblazing SKS, is geared to anticipate and deal with it.

Because of the heightened public and regulatory oversight, the rules of the game change dramatically once a company gets itself listed on the stock exchange. Individuals are also provoked into reacting very differently as a lot more is at stake, financially or otherwise.

Irrespective of the reasons, “sacking” of the CEO after an evidently spectacular spell may appear incorrect but the truth is that SKS would have easily got away it, had it not been a publicly held and listed company. But now, the amount of time and resource that it would have to employ to deal with the consequences of its actions would be enormous and would certainly detract from its core business of serving the unbanked.

While this incident, one may even argue, will only lead to better corporate governance and transparency, the question really is whether our MFIs are truly ready for an IPO yet. And for now, the answer unfortunately is a ‘no’.

With an already nervous RBI (Reserve Bank of India) and Ministry of Finance wary of the path being charted out by the Indian MFIs and now SEBI (Securities and Exchange Board of India), the market regulator asking SKS unpleasant questions, it’s perhaps a time to pause and introspect. In the end, shouldn’t the true measure of an MFI’s success be when people on the street instead of asking in surprise “So is microfinance really that profitable?” as they did in the wake of SKS IPO, ask rather “Is microfinance really that impactful?” We need to shift our focus away from the means and on to the end. And that remains as big challenge as ever.