Mumbai: SKS Microfinance Ltd’s annual general meeting (AGM) in Mumbai on Tuesday was a largely tame affair with SKS Trust Advisors Pvt. Ltd (STAPL), the largest shareholder in the company, choosing not to press its demand for a board seat for founder Vikram Akula.

STAPL, however, forced the company to put all seven resolutions to vote at the AGM—four ordinary and three special resolutions, including one on reappointment of its managing director and chief executive officer (CEO) M.R. Rao. All resolutions were passed except one special resolution on employees’ stock options.

The Trust also wrote to the capital market regulator, the Securities and Exchange Board of India (Sebi), seeking its intervention to withhold the results of the vote. It cited “irregularities” by the company at the AGM in the conduct of the poll and sought “an independent enquiry”.

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“We believe if the incomplete proxies were precluded from the valid votes as decided by the scrutinizers, the results may well have been different,” Bikshamaiah Gujja, chairman and managing director of the Trust, said.

Akula founded SKS in 1997, built it into India’s largest lender to the underprivileged, unbanked poor and steered it through an initial public offering (IPO) in 2010 that was oversubscribed almost 14 times. Along the way, he became the poster-boy of India’s microfinance industry.

Today, the company wants to have nothing to do with Akula, 45, who left SKS Microfinance in November 2011 amid differences between him and top management on the future course of the company, one of the world’s only two publicly traded microlenders.

Behind the SKS board’s reluctance lies deep-rooted animosities, mistrust, and differences over the kind of business model it should pursue—a tale Mint has pieced together after interviews with a dozen people, including board members, management executives and investors, most of whom spoke on condition of anonymity.

STAPL had demanded a board seat for Akula in the microfinance institution (MFI) but faced stiff resistance from the management. It dropped the proposal and suggested a seat instead for Ravi Reddy, one of the early investors in SKS and an associate of Akula, but the board declined to accept him either.

The SKS board wants the Trust to nominate an independent director of repute who will be acceptable to all— obviously that’s not Akula or a person associated with him.

STAPL, the sole trustee of five mutual benefit trusts (MBTs) whose beneficiaries are self-help groups has been planning to approach the Company Law Board for mediation on the matter and exploring legal options.

It has also been keenly watching a legal fight at Yes Bank Ltd between the bank’s board and the family of its co-founder, the late Ashok Kapur, who died in the 26 November 2008 Mumbai terrorist attack, over granting a seat to Kapur’s daughter. But the fight in the new-generation private bank has been dragging on for months with no solution in sight, providing little encouragement to the Trust.

What was, anyway, the provocation for SKS Trust to put forward Akula as its nominee for a board seat at SKS Microfinance?

There is, of course, Akula’s stated wish to return to the company he founded and nurtured. “On my end, I would love to return to a leadership role at the company. After all, financial inclusion is my passion and I have spent nearly 15 years building SKS,” Akula said in a September interview with Business Standard.

Another reason could be the central government’s decision to create India’s 29th state by dividing Andhra Pradesh and granting statehood to the Telangana region. Andhra Pradesh, Akula’s home state, is where SKS took birth. Akula has deep knowledge of doing business in Telangana and political connectivity with that region.

Once Telangana is created, the new state may repeal the 2010 law enacted by the Andhra Pradesh assembly that made it difficult for MFIs to do business in the state. Led by “son of the soil” Akula, SKS can start recovering bad debts and build new business.

Akula is also well known to global investors; raising money from the international markets to support future loan growth could be easier for SKS with him on the board.

Change in business model

But the SKS management has strong reservations against his return.

For one thing, the company’s board believes that a “controversial” member, who wouldn’t operate in harmony with the management, will not add value to the lender. The management is resisting his re-entry as the company has started making profits again and Akula may rock the boat with his reservations against SKS Microfinance’s current business model.

From being a pure-play microfinance institution, SKS has started selling other financial products, including insurance and gold. It has converted itself from a microfinance institution to a multi-product rural financial services company. The decision to change the business model was taken in August 2011 at a meeting in San Francisco.

Akula had different ideas. He was against “profiteering” and “exploiting” the poor in the belief that gold loans were essentially nothing more than “pawn broking”. SKS mis-sold insurance products and got penalized by the insurance regulator, people who support Akula’s business philosophy say.

The chorus within the company is that Akula is not the right person to run the business. The conflict has something to do with his personality—he does not seem to be able to get along with most in SKS.

“He is…impossible to work with. He lacks basic people skill; If things go well, he will take the credit; if things don’t go well, he will blame others,” says one investor in SKS on condition of anonymity.

Another investor says Akula is not qualified to run SKS because he lacks the financial skills. Akula’s knowledge of the MFI business dates back to a time when it was a localized phenomenon with the focus on a borrower model and weekly repayment schedules. Now, the model is changing—it is distribution-led; an MFI also needs to ensure end use or utilization of money for the purpose for which it is advanced.

But there are others who point out that in 2008, when Akula stepped down from the CEO’s position, the company had 2.5 million customers, 1,000 branches, 9,000 employees and around Rs.2,100 crore loans outstanding. They argue: “Had he been so bad in people management, could he have built this empire?”.

They also contest the allegation that he tends to blame others when things go wrong. In May 2011, at a press conference in Hyderabad, Akula took responsibility and admitted procedural lapses when news of suicides by MFI customers in Andhra Pradesh made newspaper headlines.

People familiar with Akula also refer to his attention-seeking behaviour and say he is obsessed with self-promotion. At one point of time, the screensaver on every computer at SKS was a picture of Akula’s face.

Some employees in SKS say Akula “checks in” and “checks out” at his convenience. For instance, in December 2008 he resigned as managing director and CEO and became the non-executive chairman at a critical time when the company was preparing for its IPO. He returned to the company as executive chairman in September 2010 after the highly successful IPO.

To be sure, no one can take away the credit from Akula for creating SKS Microfinance and nurturing it for a decade. His followers also say he led the company’s IPO even though he was not holding an executive position.

Still, SKS insisted that under the company’s articles of association, no shareholder has the right to nominate a director, when STAPL put forward the founder’s name for a board seat.

But Gujja, the chairman of SKS Trust and mentor of Akula, was not willing to give up without a fight. Gujja, a former director of Deccan Development Society—a non-profit organization working for India’s poor through agricultural programmes, immunization drives and other social projects—gave young Akula his first job at Rs.1,000 a month in 1990. Belonging to a so-called backward caste, Akula was born in Hyderabad but brought up in the US where his father Akula Krishna, a surgeon, settled in 1970.

Until recently, the Trust held a 12.6% stake in SKS. The Companies Act of 1956 does not provide any specific privilege to any shareholder irrespective of the size of the shareholding, but under section 169 of the law, any shareholder with a 10% stake can call an extraordinary general meeting.

It can also seek a board seat but it needs the support of the majority stakeholders to get it. The Trust raised its stake by buying shares from the market and lobbied with a few other stakeholders to garner support for its nominee on the board.

Between May and September, the Trust raised its stake in the company from about 7.6% to 12.6%, spending around Rs.64.4 crore at an average price of Rs.121.8 per share to become the single largest shareholder in the company before claiming board representation in it. Emerging India Investment Advisors, a boutique investment banking and alternate asset management firm led by Sandeep Menon, was the transaction advisor for the Trust.

But sensing that it would not be able to get its wish, the Trust sold a fraction of its stake in October. It sold about 110,000 shares in SKS, or about a 0.1% stake, on 24 October in the open market.

The beginnings

SKS was founded as a not-for-profit organization Swayam Krishi Sangam— which translates as self-work society— in late 1997. It was in the business of giving tiny loans to underprivileged borrowers mostly concentrated in Andhra Pradesh, India’s fourth largest state by area and fifth by population. It disbursed its first loan on 28 June 1998.

In 2005, Akula converted it from a non-government organization into a for-profit, non-banking finance company with a minimum capital of Rs.2 crore. Sangam lent money to its 16,000 women borrowers in Andhra Pradesh to form the share capital of SKS. This was done through the MBTs.

The five MBTs initially held a 99.5% stake in SKS. The stake got diluted with new investors coming in. At the time of SKS’s IPO in July 2010, the five MBTs collectively held a 16.1% stake in it.

Ahead of the IPO, the company wanted to set up a new governance structure for the MBTs to insulate SKS post-listing from any adverse findings or developments at the SKS trusts. That paved the way for setting up STAPL in November 2009. Geoff Woolley of Unitus Inc., an SKS board member, was instrumental in getting this done. Unitus, formed by some employees of Microsoft Corp., was one of the early-stage investors in SKS.

It was decided that STAPL would have independent directors on its board and be run professionally. Sandeep Farias, founder of investment fund Elevar Equity, Robert Pavrey, his colleague, Narayan Ramachandran, then with Morgan Stanley, Anu Aga, former chairperson of Thermax Ltd, and Gurcharan Das, former CEO of Procter and Gamble India, were appointed as directors.

Akula, many in SKS say, was not willing to give up control over the trusts but the private equity investors persuaded him to reconstitute them in the run-up to the IPO.

It was reconstituted, but Akula was not happy with the new structure. Woolley had to step down and Akula got the freedom to deal with the trust structure and the trustees. It was decided that he would have the final say on where the trust money would go and the trustees would administer his plans. Since the trustees were all eminent and independent persons, and not willing to accept a lame-duck position, they resigned and Akula gained total control over the Trust. This was first of three attempts to reconstitute the Trust.

After November 2009, amendments were made in March 2010, February 2012 and May 2012 to Trust deeds. All powers, including appointment and removal of trustees, approval of accounts, and elimination of social audits now vests with the settlor, the SKS NGO, the original not-for-profit organization. Akula is one of the seven members on its board.

People who are aware of Akula’s side of the story of the Trust’s reconstitution say it is a private trust but under Woolley’s scheme of things, the plan was to run it like the Ford Foundation, which Akula did not approve of. He found that women borrowers of SKS were not receiving benefits under the new Trust structure and there was a conflict of interest because at least one trustee was benefiting by taking financial decisions that were hurting the Trust.

Not everybody supports Akula’s point of view. SKS board members and many former trustees of SKS trusts expressed concern about governance at the trusts. In a recent article in The Economic Times, Ankur Sarin, a professor at Indian Institute of Management, Ahmedabad, and a former trustee, said that the Trust’s governance is as undemocratic as that of any other NGO. “There is a need to go beyond individuals and symbolic motions to make decision-making far more participative and inclusive than, I believe, it currently is.”

“I left because I wanted to do developmental work with the trusts,” said Sarin. “Instead, I found the trusts increasingly diverted and distracted by the corporate battle being waged.”

Gujja is the chairman of the Trust and Nirup Reddy, a Supreme Court lawyer, is a trustee but the settlor has the power to appoint, remove and nominate trustees and approve its accounts. The Trust has assets worth around Rs.300 crore. At the current market price, its holding in SKS is worth around Rs.236 crore.

Among other controversies that plagued SKS before the IPO was that it sold shares to hedge fund Tree Line Asia for Rs.60 crore, at a valuation more than double that was paid by Infosys Ltd founder N.R. Narayana Murthy’s fund Catamaran a month earlier. Treeline was sold stock at Rs.632 per share while Catamaran was offered stock at Rs.300 apiece. The company justified the deal, even though the Treeline deal was discussed ahead of the Catamaran transaction, it was sealed later. Murthy was on an advisory board of SKS which never met.

Who is Ravi Reddy?

One of the early investors in SKS, Reddy—through Kismet Microfinance —held a 5.21% stake in the company as on 30 September.

“I had known Ravi a long time—we’re actually distantly related—and had hit him up for an initial donation in early 1997. At that point, he was interested in SKS, but he was working 24/7 on Think Systems and was not in a position to do anything substantial,” Akula wrote in his book, A Fistful of Rice: My Unexpected Quest to End Poverty Through Profitability.

In 1998, when SKS began operations in Tumnoor village in Medak district of Andhra Pradesh, Reddy offered a $50,000 donation, the book says. Later, when SKS decided to migrate from a non-profit to for-profit model, Akula again approached Reddy for assistance.

“Ravi had always been drawn to our for-profit vision for SKS, and he, along with his partner Sandeep Tungare, were eager to become angel investors. He also helped me to identify other investors who might be interested in stepping up,” Akula wrote in his book.

The Trust is irked by the fact that relatively smaller shareholders like Paresh Patel and Sumir Chadha are given a board seat while it has not been given one. Patel is CEO of India-focused hedge fund Sandstone Capital and Chadha is managing director of WestBridge Capital. Sandstone had a 7.71% stake in the company and WestBridge 4.33%, as on 30 September.

In September, when the five MBTs sought a board seat in SKS for Akula in their capacity as the largest shareholder in the company, it set the stage for the second round of an intensely intriguing corporate battle; the first round was waged in November 2011 when Akula was forced to leave SKS.

At the time of leaving, Akula was drafting plans to expand in Sri Lanka, Nepal, China, Vietnam, Mali, Nigeria, Morocco, Egypt, Afghanistan, Peru, Colombia and even the US. Although the firm maintained that his exit was voluntary, differences between the founder-chairman and the top management played a crucial role in the run of events.

Roots of conflict

The differences were many. After the Andhra Pradesh government clamped down on microfinance in October 2010, Akula wanted to launch a mass movement against the government in which thousands of borrowers would gather and microfinance institutions would disburse loans to them.

He was also against the repayment of loans advanced to the MFI by commercial banks and pushing the company to a corporate debt restructuring, or CDR, platform.

But the board did not approve of this as SKS by that time was a listed entity. The board felt that in financial services, once a default takes place, the stigma would be difficult to overcome. The board decided that SKS could not afford to become a defaulter and it was better to shrink the balance sheet, recover money from customers and repay all loans.

Besides, a listed company could not look for a political solution to the problem. The Andhra Pradesh government’s clampdown, among other things, was provoked by indiscriminate multiple loans extended by MFIs and their alleged coercive collection practices that led to some suicides.

An investigation carried out by the Guardian’s Human Civil Rights Forum, at the instance of Akula (who was chairman then) and the company’s CEO M.R Rao, without the knowledge of the board, found that in seven of the 22 suicide cases, SKS employees had played a role.

Referring to one particular case—Dullapalli Sita of Apparaopeta in Tadepalligudem—the investigative report says SKS “resorted to intimidation, humiliation and other legal and immoral action against the victim and even after her death her family was subjected to harassment”. However, an investigation carried out by the state government exonerated the company from these charges in all cases except one.

The Andhra Pradesh law made government approval mandatory for every second loan to the same borrower, extended the repayment cycle and barred MFIs from approaching the customer’s doorstep.

Loan write-offs in Andhra Pradesh, following a crisis triggered by the contentious state law, brought down SKS’s net worth to Rs.390 crore in March this year from Rs.1,795.9 crore in September 2010. SKS has written off loans worth Rs.1,362 crore and pared staff in the state to 1,200 from around 7,000. The firm scaled down the number of branches in Andhra Pradesh to 120 from 550.

Some employees of SKS say that after the state clampdown over the alleged suicides of MFI borrowers, Akula found that the company had diluted its processes and training of borrowers; it was also giving incentives to employees in the form of consumer goods for disbursing more loans and training more customers.

As a result of this, quality was compromised and Akula raised slogans for “back to basics” and “responsible microfinance”. But his voice was not heard as the focus was on scale and profitability. The August 2011 San Francisco meeting could not resolve the differences and had Akula not resigned, he risked being sacked.

Political risk

Incidentally, Suresh Gurumani, former CEO, identified political risk as the biggest risk for SKS at a time when it was growing rapidly, raking in profits and its borrowers were a big vote bank. It was only natural that it would attract the attention of politicians and things could go horribly wrong.

The microfinance sector was getting overheated with private equity investors putting money in most companies involved in giving tiny loans, chasing growth as if there was no tomorrow, and microfinance institutions were poaching each other’s customers to scale up business.

So an industry body, Microfinance Institutions Network, or MFIN, was created at the end of 2009; it was instrumental in promoting a credit bureau. A code of conduct was put in place with limits on borrowing and the number of customers. The objective was to alleviate political risk. Akula, industry people say, was not too excited at the concept of a credit bureau to keep a tab on the MFI borrowers as he was a staunch believer in the group model—in which a group of women is responsible for every individual paying back her loan.

Around April 2008, when Gurumani was heading Barclays Plc.’s retail operations in India, his former colleague M.R. Rao, then chief operating officer at SKS, approached Gurumani with an offer of the CEO’s job. Rao had worked with Gurumani in Standard Chartered Bank in 1995 where the latter was heading the bank’s auto loan segment and Rao, regional manager, north, auto loans, was reporting to him.

While working for Barclays, Gurumani was familiar with SKS’ mobile banking projects. He was tempted to consider the SKS offer as, by that time, Barclays had lost out on a bid for ABN Amro Holding NV and had to be content with being a one-branch bank while SKS had 1,400 branches.

Gurumani joined SKS in December 2008 as managing director and CEO with the mandate of transforming SKS with better technology and processes. There was a plan to hit the capital market with an IPO in the first half of 2011, which was later advanced.

Ahead of the IPO, in December 2009, Gurumani, along with Rao and Akula, went to Mexico to study Compartamos Banco, the largest microfinance bank in Latin America, serving more than 2.5 million clients. Headquartered in Mexico City, the bank was founded in 1990 by Jose Ignacio Avalos Hernandez as an NGO.

Compartamos wanted to alleviate poverty by providing microcredit to small businesses, initially by offering loans to women at the base of the economic pyramid. It was incorporated as a for-profit company in 2000, and obtained a commercial banking licence in 2006. In 2007 Compartamos raised $467 million from its IPO.

While Akula and Rao had to leave Mexico in a hurry because of business exigencies, Gurumani stayed back to study the local model. His finding: microfinance is a business of making money and not eradicating poverty.

Back in India, he claims to have advised Akula to change the mission of the company to empowering women from eradicating poverty. “Let’s say we are improving financial inclusion,” Gurumani claims to have told him but Akula refused to budge.

So eradication of poverty remained the mission of SKS in its IPO prospectus filed with the capital market regulator and Akula’s email signature remained “Vikram Akula, founder and chairman, SKS Microfinance—Empowering Poor”.

The political establishment did not take it kindly when stories of coercion by loan collection agents and suicides spread across Andhra Pradesh.

High growth

In the run-up to the IPO, SKS’ growth was spiralling out of control and the private equity investors were averse to stemming the growth. It had some 2,200 branches and 22,000 employees at the time. The company tried to focus on diversifying, slowing growth and building secured lending products like mortgage and gold loans, but could not succeed under pressure from all stakeholders. It also tried to sell health insurance, mobile phones, and solar lights, etc. but they did not work. Insurance distribution failed as there were too many bogus claims and policies were sold like a savings product.

The company raised Rs.1,653 crore through a share sale in July 2010 and the stock had a stellar listing on 16 August, gaining 10.51% to close at Rs.1,088.58 against an issue price of Rs.985. Three weeks later, Akula became executive chairman and Rao deputy CEO. Around the same time, it was decided that Gurumani was not the right person to lead SKS. On 3 October, SKS terminated the services of Gurumani as CEO, triggering a 6% fall in the company’s stock. Gurumani was replaced by Rao as the chief of SKS.

The company has “withdrawn all powers and authorities granted to him (Gurumani) or otherwise enjoyed by him in the company as MD and CEO, with immediate effect”, SKS said in a regulatory filing with the BSE. However, the company did not provide any reason for the termination. According to SKS’ filing with the Securities and Exchange Board of India (Sebi), Gurumani had a five-year contract from 1 April 2009 to expire on 31 March 2014.

A year later, when Akula was pushed against the wall and forced to quit, he desperately wanted Gurumani to come back to SKS to be by his side.

Control and greed

Those who have been closely watching SKS in the MFI industry says the story of SKS is the story of its founder’s obsession for control and investors’ greed.

The private equity investors cared for the scale of business as scale ramps up valuations. By 2011, Akula was riding a tiger he could not tame. Greed, obsession for control and the Andhra Pradesh state law made for a deadly cocktail that almost killed SKS. It is being resurrected now, clawing back to the black and expanding outside the southern state.

Hit by the crisis, the microlender reported losses for seven consecutive quarters before registering a profit in the December quarter last year. It has been in the black for four quarters.

On 5 September, Akula made a brief appearance at the SKS headquarters at Kundanbagh, Begumpet, in Hyderabad, but left after exchanging pleasantries with managing director Rao and chief financial officer S. Dilli Raj. Possibly he was certain that he would make a comeback. But the company is not ready to allow this to happen.

People familiar with the company say the era of celebrity promoters is over and it will not be easy for Akula to stage a return.

He can, of course, set up a new venture and join hands with others after a year to chase his dream. At the time of leaving SKS, Akula entered into a non-compete clause which prevents him from joining the board for two years and entering the microfinance space for three years till November 2014.

For now, he is mentoring social entrepreneurs in different parts of the world and in a very limited way experimenting with use of mobile telephony in the rural finance space at SKS trusts.

He believes that microfinance is a core solution to the global poverty problem and yet it could be highly profitable—a balance all microfinance entities are struggling to achieve.

Meanwhile, back to the path of profit and growth and having largely insulated itself from the Andhra Pradesh market, SKS is actively considering changing its name.

A committee of the board is working on this while marketing strategist Jack Trout, president of the US-based Trout and Partners Ltd, an international marketing consultancy, is working on its rebranding and repositioning.

The idea is to avoid any mix-up with the trusts that carry the same name. That’s the official stance. What that would accomplish is to effectively remove the last trace of its founder—the name—from the company.