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Temasek Snared in India as Crackdown Slows Microfinance IPOs

Private equity companies may struggle to recoup almost $565 million in investments in India’s microfinance industry since 2006 after a regulatory backlash led at least two firms to delay initial public offerings.

Temasek Holdings Pte, billionaire George Soros and Sequoia Capital are among investors who’ve put money into the world’s largest market for micro-loans as lending and profits swelled. The boom culminated with the IPO of Sequoia-backed SKS Microfinance Ltd., which raised 16.3 billion rupees ($357 million) in August.

The risks associated with the industry were highlighted in October, when India’s southern Andhra Pradesh state capped loan rates and cracked down on recovery tactics, causing lending and collections to slump and private equity-backed micro-lenders to postpone share sales, Bloomberg Businessweek reports in its Dec. 6 edition.

“I don’t think private equity investors will recover their money at the rates they thought they would,” said Sanjay Sinha, managing director of Gurgaon, India-based Micro-Credit Ratings International Ltd. “The market is not as wonderful or as large as the investors made it out to be, and they paid far too high prices for their stakes.”

Valuations for Indian microfinance companies, which focus on providing loans in areas largely shut out from traditional banking services, are three times the global median, based on private equity investments, the Consultative Group to Assist the Poor, a Washington-based policy and research center that aims to help increase financial access, said in a report in March.

Below IPO Price

SKS Microfinance shares have lost 41 percent since Oct. 15, when Andhra Pradesh, which accounts for almost a third of India’s microfinance loans, said interest payments shouldn’t exceed the loan amount and barred lenders from collecting on a weekly basis. Shares in SKS, whose backers also include a hedge fund controlled by Soros, closed 28 percent below their IPO price yesterday.

Michael Vachon, a spokesman for Soros in New York, couldn’t be reached after office-hours for comment.

The move by the Andhra Pradesh government, following suicides by borrowers unable to repay debts, spooked investors as collections tumbled to 20 percent of normal levels. An industry lobbying group said the microfinance companies may seek emergency funds from banks.

Menlo Park, California-based Sequoia, an early backer of Google Inc. and Yahoo! Inc., is among funds that will curtail investment in the industry until the federal government sets unified national rules, Sumir Chadha, Sequoia’s 39-year-old India head, said in an interview from Mumbai.

‘Courageous or Mad’

“No logical person would invest in microfinance right now, because there is no microfinance right now,” said Vineet Rai, founder of Mumbai-based investment company Aavishkaar Venture Management Services Pvt. “If all the big guys are facing the risk of not being around, you have to be very courageous or mad to invest.”

Aavishkaar’s funds invested $18 million in seven Indian micro-lenders including Spandana Sphoorty Financial Ltd., Rai said in a Nov. 26 interview.

Spandana, whose backers also include Singapore’s state investment company Temasek, on Nov. 22 said it would indefinitely postpone an IPO through which it had aimed to raise as much as $400 million. Andhra Pradesh accounts for about half of the Hyderabad-based company’s loans.

A spokesman for Temasek declined to comment. The company invested $50 million in Spandana in August 2009, according to Chennai-based research service Venture Intelligence.

Chandler’s Share Microfin

Rival Share Microfin Ltd., backed by New Zealand billionaire Christopher Chandler, said it would delay an IPO planned for next year. The lender had aimed to raise about 10 billion rupees.

Microfinance gained prominence globally when Muhammad Yunus won the Nobel Peace Prize in 2006 for his role in founding Bangladesh’s Grameen Bank. India, with 1.2 billion people and banking services available in 5 percent of cities and towns, became a hotbed for such credit.

Private equity investors and venture capital companies have invested $565 million in the industry since 2006, including inflows of about $117 million so far this year, according to Venture Intelligence.

Microfinance loans have grown about 88 percent annually for the past five years in India, according to Micro-Credit Ratings, a provider of ratings services for potential investors. The value of total loans outstanding was more than 240 billion rupees as of Sept. 30, according to lobbying group Microfinance Institutions Network.

Emergency Funds

The expansion was brought to a halt following the Andhra Pradesh decision, as banks that provide the bulk of funding for the microfinance industry curbed financing. Commercial banks in India had 101 billion rupees in loans outstanding to micro- lenders as of March 31, according to the National Bank for Agriculture & Rural Development.

To deal with the fallout of the crisis, the industry is seeking 10 billion rupees from banks for an emergency liquidity fund, Microfinance Institutions Network Chairman Vijay Mahajan said in an interview in New Delhi on Nov. 16.

Micro-lenders are barred from taking deposits in India, making them vulnerable to swings in repayments.

“Today, nobody wants to invest in the sector” because of uncertainty about regulation, said Sequoia’s Chadha. The U.S. firm sold shares worth 3.93 billion rupees in the SKS IPO, according to data compiled by Bloomberg.

Sequoia’s Holding

Sequoia, whose funds had bought shares of SKS for an average price of 61.18 rupees and 137.53 rupees before the IPO, remains the largest shareholder with a 14 percent stake as of Sept. 30, according to the Bombay Stock Exchange. That holding is now worth 7.16 billion rupees, based on yesterday’s closing price of 711.65 rupees.

India’s finance ministry plans to introduce new legislation for the microfinance industry, federal minister Namo Narain Meena said Nov. 23. The bill will be developed in consultation with the central bank, which last month appointed a sub- committee to study the sector following the recent upheaval.

Debt ratings for 12 microfinance companies including SKS, Spandana and Asmitha Microfin Ltd. may be downgraded, Crisil Ltd., the Indian unit of Standard & Poor’s, said Nov. 22, citing the risk of slower growth and tougher financing conditions.

Private equity funds are partly responsible for fueling “unsustainable” growth in loans by pouring capital into microfinance companies, Sinha said. The investors may also have pushed companies to produce faster growth, leading to poor lending practices, he said.

Multiple Loans

In Andhra Pradesh, each poor household has 9.6 loans on average, according to the Microfinance India State of the Sector Report 2010 from non-profit Access Development Services.

“When we tried to raise capital in 2007, everybody told us, ’You may be the pioneer, but you guys are too slow and are not profitable,’” said Mahajan, who is also chairman of Hyderabad- based Basix Group. “So the next year we grew by 100 percent and we also increased our profitability significantly, without increasing costs.”

Mahajan said his company has shelved a plan to sell shares next year because of the crisis.

The government may step in to support the industry only after the regulatory backlash claims some casualties, Sinha said.

“I wouldn’t be surprised if the government lets a few organizations collapse and rescues the sector after that,” he said. “The fear is that no lessons will be learnt without at least one collapse.”

To contact the reporter on this story: Ruth David in Mumbai at rdavid9@bloomberg.net

To contact the editor responsible for this story: Philip Lagerkranser at lagerkranser@bloomberg.net

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