This high-profile microfinance company has sacked its CEO, under a shroud of secrecy. The bigger question is whether these aggressive, for-profit organisations should be allowed to play havoc with the finances of the rural poor

|A week after SKS Microfinance shocked the corporate world by sacking its CEO, the company's image as the messiah of India's rural poor is suffering from a steady erosion. One of the main reasons for SKS's damaged public image is that the company's board of directors and the glittering list of SKS shareholders have chosen to maintain a stunning silence over the way the CEO was sacked and also the swirling rumours regarding how the company was run.

The Securities and Exchange Board of India (SEBI) has done well this time to react quickly and publicly in asking the company to explain its action. It has also done well to let it be known (through media leaks) that it is not satisfied with the answer. We learn that one reason for SEBI's quick response could be the fact that before the IPO (Initial Public Offering), some of its shareholders had complained about a preferential offer to a select group, which was later dropped.

The silence of SKS Microfinance presents an interesting case study about perceptions of governance and accountability at the board level. While there is no indication of a financial scam like Satyam, here is another case, where neither a glittering list of internationally renowned corporate achievers (Vinod Khosla, NR Narayana Murthy) and top funds such as Sequoia as shareholders nor a board packed by representatives of private-equity funds, has been able to prevent controversial and confrontationist action without explanation.

Surely the board realises that unceremoniously sacking a CEO without explanation, is a different cup of tea from maintaining a dignified distance from Vikram Akula's messy divorce and prolonged custody battle, details of which are splashed all over the Web. And if they were convinced that the CEO needed to be sacked within months of an IPO, they need to explain to the retail shareholders who are not as privileged.

When asked, Mr NR Narayana Murthy sent me this text reply, "since the issue is in court, I would not like to comment on this. I am also not aware of what exactly happened for this result".

On whether he was consulted before this controversial decision he said, "It is not proper to comment," at this stage when the issue is still sub-judice. It may be recalled that Mr Narayana Murthy's venture capital company acquired a substantial stake in SKS Microfinance just before the IPO at Rs300 a share. This investment certainly enhanced the premium that the company could command and also increased retail interest in the issue significantly. We contacted the two public relations agencies that handle SKS's media relations  - Adfactors and Sampark - and both were doubtful if the company would speak. Interestingly, it is not clear how the issue remains sub-judice when the court has decided the issue, ordered Gurumani to remain on the board and asked the company to seek general body approval for its action of sacking the CEO.

Since the company and its big shareholders are keeping mum, here are a few details we have pieced together about the sudden sacking of Suresh Gurumani. It is generally agreed and believed that the central issue was a personality clash between Vikram Akula, who wanted to take charge of the company once again, after winning the protracted custody battle for his son. Meanwhile, Suresh Gurumani, who had powered the growth of SKS Microfinance over the past two years, ensured a successful IPO, helped bring major shareholders on board and was even becoming the face of Indian microfinance (due to Akula's long absences from India), wasn't quite willing to give up. The flashpoint allegedly was Akula's objection to Gurumani trying to centralise processes. Whether centralised processes are the better thing to do will be evident in the coming years, especially when microfinance companies are chasing India's rural poor in exactly the same manner as they and private banks had chased the urban poor with expensive personal loans and credit cards.

It appears that Gurumani was all set to resign quietly. There was an understanding on his severance deal, including a three- to six-month gardening leave (when he cannot join a rival firm), 1.25 lakh stock options and payment of his salary for a year (a stunning Rs2 crore a year in a microfinance company). This was apparently negotiated by directors
PH Ravikumar, Sumit Chhada, Paresh Patel and Vikram Akula. However, we learn that the lawyers who drafted the severance deal inserted so many onerous conditions that Gurumani decided to reject it. He was then threatened with sacking and told that it could lead to forfeiture of his options.

Source say that Gurumani's employment terms specified that if he was terminated 'with cause', he would lose all his stock options, but if the company couldn't come up with reasons to sack him, he not only walks away with his stock options (valued at around Rs300 crore at today's prices). Given this deal, we learn that the company tired to find a 'cause' for sacking Gurumani. For a while, they toyed with the idea of questioning his frequent visits to Mumbai, where his family continued to live.

Amazing as it may seem, the high-profile SKS Microfinance was headed by two people who spent very little time in Hyderabad. Akula was in the US almost every alternative week for his divorce and custody battles; in between he even found time to romance a well-known actress. We learn that some sensible voices at the board rejected the idea of investigating Gurumani's Mumbai trips too much, because there could be equal questions about Akula's US visits.

As things stand, some dirty linen is bound to be washed at the general body meeting. But, it is unlikely that Gurumani will find the numbers to back his continuance at SKS Microfinance as CEO. Gurumani also has no option but to fight, since SKS's action in sacking him has already made his employability an issue and he will want the best exit deal. His short stint at SKS Microfinance leaves him a very rich man who has little to lose. On the other hand SKS Microfinance and the microfinance industry itself has a lot more to lose. The fracas is just the trigger that was probably needed for many of us to question whether microfinance companies need to be reigned in and investigated before they create a moral hazard among India's rural poor by plying them with onerous loans that they cannot repay.

Maybe it is time the Reserve Bank of India woke up to what Mohammed Yunus, the father of microfinance, has been saying about aggressive, for-profit microfinance companies and their operations. — Sucheta Dalal