Rich I.P.O. Brings Controversy to SKS Microfinance

An Indian company with rich American backers is about to raise up to $350 million in a stock offering closely watched by philanthropists around the world, showing that big profits can be made from small helping-hand loans to poor cowherds and basket weavers.

The company, SKS Microfinance, is one of the biggest players in the field known as microfinance, which involves loans, often as small as $20, that banks might consider too tiny and risky to bother with.

SKS was set up as what philanthropists call a "social enterprise" - a business based on the concept of doing well by doing good.

And there is no question that the company's 41-year-old Indian-American founder, Vikram Akula, and investors who include prominent Silicon Valley venture capitalists will do very well indeed from the I.P.O. Mr. Akula has already privately sold shares worth almost $13 million, and he still holds stock options potentially worth $55 million.

The question is whether the social good will be as amply rewarded.

SKS Microfinance is not the first microlender to go public, and there has long been debate over whether social enterprises should be turned into giant commercial operations. Proponents of commercial microfinancing say the money raised can provide even more loans to the needy than relying only on charitable donations.

But the I.P.O. for SKS, one of the field's biggest stock offerings yet, has caused its own type of controversy.

The disputes involve two charitable microfinance organizations that helped Mr. Akula put SKS on its feet and financed it through its early days. It is not clear what will happen with the money those groups will make from the I.P.O.

At one of those groups - five Indian trusts that now hold the assets of Mr. Akula's original nonprofit version of SKS - two board members resigned in March over his plan to steer funds toward his original nonprofit group rather than granting them to many charitable entities.

The other nonprofit ensnared in controversy is a Seattle-based group called Unitus, which holds a stake in SKS that will be worth millions after the I.P.O. The group's board shocked the nonprofit community this month by saying that all of the organization's 40-person staff would be laid off and that Unitus would no longer be involved in microfinance activities.

That stunned donors of Unitus, which was set up a decade ago specifically to support microfinance. As recently as June, a newly hired chief executive at the group had been discussing ambitious new projects with potential supporters, including the Bill and Melinda Gates Foundation.

In charity circles, people wondered about the motives of the Unitus board members, at least four of whom had invested in SKS Microfinance themselves and thus would reap profits from the I.P.O.

"If Unitus is closing down, that shows what is the real result of this I.P.O.," said Muhammad Yunus, an economics professor who is considered the father of microfinance and has been critical of the SKS stock offering. "You are now encouraging the profit-maximizing part, and the nonprofits are closing down."

Joseph Grenny, the chairman of Unitus's board and an SKS investor, declined to say what would happen to Unitus's proceeds from the offering. Because Unitus is listed as a "promoter" of the stock offering, he said he could not comment without violating Indian law.

"That's all speculative at this point, anyway," he said in a telephone interview.

Mr. Grenny said he and the other board members would be donating the proceeds to charities - although he would not say whether Unitus would be among them. In two of the cases he said, the investments were made through charitable foundations the directors were involved with and the proceeds would go to those foundations.

One big Unitus donor is the Omidyar Network, the philanthropic and investment venture of an eBay founder, Pierre Omidyar. The Omidyar group's managing partner, Matt Bannick, said he was surprised by the Unitus board's decision to scale back, because he was impressed by its plans for future nonprofit microfinance projects.

"I felt that not only had Unitus done a tremendous amount of good with that model, but also that it remains highly relevant," Mr. Bannick said.

Omidyar Network had been concerned enough about the structure of the Unitus board that last autumn it paid for a study by a management consultant. According to two former Unitus executives, the study concluded that some directors had too many nonprofit and for-profit roles with Unitus - particularly one, Geoffrey Woolley, who was chairman of the investment fund running Unitus's profit-making investments and was an investor in those funds and in SKS.

Mr. Woolley resigned from the board last fall, but Mr. Grenny said he would now be brought back to help plan Unitus's future beyond microfinance. Mr. Woolley declined to comment.

The unwinding of Unitus stands in contrast to the way Acción, another nonprofit group that focuses on microfinance, handled a $140 million windfall from the 2007 public offering of the Mexican microlender Compartamos. Acción, which still holds a 9 percent stake in the Compartamos, has used the money to expand its microfinance operations, and its executives and directors had no investments in the operation.

The Unitus board, in the news release announcing its decision to withdraw from microfinance, said the group's remaining assets would directed into "new early-stage, poverty-focused philanthropic activities."

But with Unitus's remaining skeletal staff expected to be gone by autumn, and with Mr. Grenny declining to discuss the matter, it is not clear who will manage the group's soon to be sizable financial holdings, or how they will be used.

"The board members aren't full-timers or experts," said Timothy Ogden, a philanthropy consultant and editor of the blog, Philanthropy Action. "I don't know how you avoid wasting the millions of dollars the organization is supposed to get through the I.P.O. and its stake in SKS, if you don't have the staff to make smart choices."

In India, there are also questions about how nonprofit assets will be handled after the SKS I.P.O.

SKS's roots lie in a nonprofit microfinance organization, known as SKS Society, that Mr. Akula set up in 1997. To help it grow faster, in 2005 Mr. Akula set up a profit-making offshoot, SKS Microfinance, to attract commercial financing.

No one doubts that the money SKS Microfinance raises in the offering will enable it to make even more loans to needy applicants. As of March it had about 6.8 million borrowers, holding $624 million worth of microloans, making SKS among the biggest of the world's 1,800 or so microfinance organizations.

The controversy lies in the five trusts that served as the bridge between the original nonprofit SKS Society and SKS Microfinance.

When Mr. Akula started the profit-making SKS Microfinance, virtually all of the company was owned by the trusts. Over time, as other investors came in - including the American firm Sequoia Capital and the Silicon Valley venture capitalist Vinod Khosla - the trusts' stake was diluted to 15 percent.

But the trusts still stand to benefit in a big way from the public offering. They are selling shares worth up to $42 million and will continue to own a stake worth as much as $175 million - collectively making them one of the biggest endowments in India.

A new, supposedly independent board was created last fall to oversee the trusts and the new wealth they will have. But that structure quickly fell apart.

After the board's first meeting in March, two of the handful of directors resigned: Narayan Ramachandran, who previously headed the Indian operations of the investment bank Morgan Stanley, and Anu Aga, a prominent philanthropist and former chairwoman of an Indian industrial company, Thermax.

Mr. Ramachandran and Ms. Aga referred requests for comment to the company. But several people close to the situation said the two had left over differences with Mr. Akula - who at the time was not a member of the trust board - about how to spend money from the offering.

Mr. Akula wanted the trusts to support education, health and other programs for borrowers of SKS through the nonprofit SKS Society. The two board members reportedly preferred instead to establish a grant-making institution similar to a private foundation that could funnel that money to other, already established social programs.

Mr. Akula declined to discuss the trusts or other specifics relating to the I.P.O., citing Indian and American securities rules. He and a friend, who is a professor at the Indian Institute of Management, Ahmedabad, are the only board members. The company's prospectus says three independent directors are being recruited.

Mr. Khosla, the Silicon Valley investor, said Mr. Akula's approach would measurably help SKS borrowers. Giving grants, he said, would spread the money too thinly to too many groups.

Mr. Akula has become something of a celebrity in India, and some people who know him - including his ex-wife, Malini Byanna - said he wanted to continue controlling the trusts and SKS Society because he has political ambitions in India.

"You have to understand - every loan is a future vote," said Ms. Byanna, a Chicago-based lawyer who has been involved in a long legal battle with Mr. Akula over custody of their son, Tejas.

But at a news conference in India on Monday, Mr. Akula, who was born in India but grew up in Schenectady, N.Y., and is still an American citizen, denied that he had political ambitions. "I will continue with SKS until poverty is eradicated in India," he said.