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The dust has settled between SKS Microfinance and Vikram Akula and the verdict is in…a complete disaster for investors in the public markets. Rewind back to 2009 when Akula was the poster boy for microfinance institutions (MFI) and was on the cover of Forbes India. A year later SKS went public on August 10, 2010 at Rs. 935 a share and closed at Rs. 1171 for a gain on the first day.  Today, SKS is trading at under Rs. 100 a share, down over 90% from its peak of Rs. 1407. Akula has since resigned from SKS and investors are resigned to the fact that they lost a lot of money during the IPO. So what happened?

The press has had a couple theories of that went wrong, one of them states there was a power struggle between Akula and the duo of CEO (Rao) and CFO (Raj). The SKS model is similar to other MFI’s in that they loan small amounts largely to village women and then the village women ensure they all pay off the loan with interest. It’s a great way to push the risk management down to the village level. This has been done successfully for many years and continues to do well. What hurt SKS more then anything else was being a publicly traded company.

When you have shareholders, their goals are pretty simple – grow the top line revenue, grow the bottom line profits which will lead to a higher stock price. In order to do that at SKS you have to find more people and give out more loans, which is very similar to what caused the economic crisis of 2008. If the investment banks wanted to sell more mortgaged backed securities (MBS) they needed more loans which meant the lending standards were relaxed – if you had a pulse you got a loan. With SKS something similar happened, they were giving loans to anybody and everybody in the state of Andhra Pradesh. Some people had 4-5 loans outstanding and those people couldn’t manage to pay them back. This led to SKS reporting less than impressive quarterly numbers which led to a downward spiral of their stock price. In addition, once the government realized people had multiple loans and SKS was charging as high as 36% in interest they hit the pause button on the SKS business model. This again led to the stock price getting pushed down even further.

I believe SKS would have been fine if they remained a for-profit but privately held company. I can understand the founding team of SKS wanting an IPO as it provides an excellent liquidity event for them to cash out, however the short term goals of the investors are completely out of sync with the long term mission of what SKS was trying to achieve.

The Indian government finally got its shit act together and approved the rules enhancing foreign direct investment (FDI) into the Indian retail segment. The bill had been hotly debated for the past 2-3 years since it has the potentially to affect many people.

The new rules allow major big box retailers that sell many brands like Walmart, Carrefour and Tesco to own 51% of the business. Whereas single store brands such as Reebok, Apple and Prada can own 100%. The timing might not be great but India is the last big market that has not been tapped yet and many brands might try their luck at the Indian consumer to grow their sales.

Locally, the retail industry is divided into two categories: organized and unorganized (aka kirana stores). Many reports have shown that 90% of all sales flow through the unorganized retail segment.  With the new guidelines, many are hoping that the organized retail sector can grab a larger share of the pie and in the process bring about a better experience for the consumer. Once of the reasons the bill was stalled for so long was the concern about how the “kirana guy” would cope if Walmart setup shop next to his store. That’s a valid point, however I think it forces the kirana shop owner to provide a much better customer experience since he can’t compete on price. Unfortunately, the concept of customer experienece is so alien to them that many will end up closing shop since they won’t be able to adjust.  On the flipside, I see many kirana shops converted into an extension of a major retailer who would service the local area and deliver the goods.

The bigger question for me is how the e-commerce space is going to play out with the new rules in place. If Amazon.com sets up shop in India will it partner with FlipKart.com or Pantaloons? Will the kirana store replace companies trying to build out the last mile mechanism for delivery (Chhotu) and payment collection (GharPay)?

It’s very early days in the retail sector and I would imagine whatever worked for these big box retailers in other countries will be very different from what ends up working in India. That’s where the local retail partner comes in and adds value since they know the local demographs, environment, buying patterns, etc… Most of the retail stocks are up today since the future looks very bright for retail and the companies that are already executing in the retail space.

In 2005, my colleague and I partnered with Refco which at the time was the largest commodities brokers in the world to launch a new product in India…what could go wrong? I landed into India on October 1, 2005 and on October 10 a press release was issued that the CEO was resigning because of “accounting irregularities”. Whenever you hear “accounting irregularities” you can safely assume the worst possible outcome, a week later Refco filed chapter 11 bankrupty. Listening to the reports over the past two weeks about the impending collapse of MF Global was like déjà vu for me, this is actually their second collapse.

The latest collapse is even more sinister then the first one. At least during the Refco collapse Phil Bennett took a loan to cover his proprietary trading (aka prop trading). However, it appears MF Global took customer segregated funds to shore up their losing prop trades on bonds which is hugh no-no. The reports are still filtering in as to what exactly happened and who knew what. However, this quote from a lawyer really ticked me off “To the best knowledge of management, there is no shortfall”. A very carefully worded statement which essentially says “don’t hold the management team accountable”.

When working with Refco during the transition to Man Financial (which eventually became MF Global) it was surreal. I just landed into India with plans to stay for 6 months while we got everything up and running. And within 10 days my dreams turned to despair. I had a great vantage point as I was sitting next to Vineet Bhatnagar, MD of Refco-Sify India, as everything was collapsing around the world for Refco. We would hear reports of what was happening via the newswire or rumors from the “New York guys” but during all this craziness Vineet was calm and cool throughout the entire ordeal. He gave interview after interview saying how the India operations were “ring-fenced” and things would be back to normal. Certain parts of the business came back to normalcy faster then others, it was a trust thing. I think the institutional guys understood their money was safe but many retail clients didn’t care what was being said.

In any event, our new fund was completely crushed…100% wanted their money back NOW. All the investors got their money back and said they would re-invest once the dust had settled. Sadly, some of India’s most prolific investors who were in the first fund did not return for the second fund which we started in March 2006 under the Man Financial banner.

Right now there are two types of people that exist at MF Global-Sify India, people that witnessed the first collapse and the “new guys.” Anyone who was there during the first collapse is a little concerned but have seen this movie before. The “new guy” is probably shitting in his pants. Having worked with the Indian management team there is no doubt they are top notch and everything continues to be above the board. There was a report in DNA Money newspaper that Vineet “had put in his papers”, I almost choked on my morning coffee when I read that. Not because “oh my god he is leaving” but rather “oh my god he would NEVER leave India”. Of course, people love sensational headlines and the MF Global collapse definately provides it.

When I first heard about Aadhaar I figured it was just another Government of India project that would go nowhere. (For a quick refresher on Aadhaar I put together a quick 10 slide summary.) As the program is starting to gain traction, many people are starting to challenge the claims and veracity of the projects purpose.

One of them is Sucheta Dalal, who is a highly acclaimed journalist who broke the story on India’s largest insider trading scandal in 1992 involving Harshad Mehta (he was the first person in India to buy a Lexus LS400). I’ve actually had a chance to meet Sucheta and she is a straight shooter. I’ve commented in the past that I feel Aadhaar will help to ease corruption. On Twitter, Sucheta had a more direct question for me:

@mrjain  please enlighten me how a number allotted to you will curb corruption? I am all ears

One of the misconceptions about Aadhaar is that it will solve every problem that affects India, it won’t. The other misconception is that it will be 100% fool proof and rock solid from day one, it won’t.  Aadhaar is a technology startup that happens to be ventured backed by the Government of India. As with any startup or government program there will be teething and integration issues that will have to be dealt with in real-time.

My answer to Sucheta’s tweet is “yes, but probably not for Sucheta and me.” It would benefit people that suffer from the “poverty tax”, which is a large percentage of the Indian population. If you receive a pension, you might have to pay a “fee” to the clerk to speed up the transaction. Same issue with food, subsided kerosene, government jobs, etc…if you want something you have to pay a fee.  That fee hurts more if you earn less and hence it’s called the poverty tax or you can call it what it really is…corruption. With an Aadhaar number the government would directly deposit the money into your bank account. No middle man to slow down the transaction or take money from you to speed up the process of getting YOUR money.

Fear, uncertainty and doubt are the 3 things that critics raise when talking about Aadhaar. Fear of what the Indian government will do with the data. Uncertainty about how much money is being spent on the project. And lastly, doubt of whether the program can achieve anything impactful.

The other complaint I’ve heard from several people is they feel it’s just a large technology project to benefit system integrators like Infosys, Wipro and TCS. In particular, a friend of mine questioned why Aadhaar was so keen on using iris and fingerprint scanners to authenticate people. Was it because that would force new hardware sales for iris and fingerprint scanner vendors. Why not use voice verification via cell phones that are so readily available? Granted, there might be issues with voice pattern recognition but why not open it up to a college competition for the top technology schools (read IIT’s) to try and solve the problem.

Personally, I think that’s where the Aadhaar team has done a rather poor job of openly communicating and should really improve in that department. I still firmly believe Aadhaar is a step in the right direction and will eventually benefit a large percentage of the Indian population.

It’s been a week since several bombs tore through South Bombay like a hurricane and already the city is getting back to normal. Some say it’s the strength, courage and/or resilience of it’s people that allows Bombay to move forward. I would simply say, we have created the perfect bubble to live in. This bubble has been created out of necessity since the political infrastructure of this country has simply lost its moral compass. Everything I read about government in India revolves around two basic issues: money and disregard for life.

Safety in this country is a joke. The police patrol the streets with nothing more then a stick and a fat belly. Money that should go towards police issued revolvers, CBs and police cars has surely been pilfered by the higher ups. When a terrorist attacks, the police are clueless and powerless as they don’t have the tools to deal with this type of threat. In the end, people die.

About two years back my parents visited Bombay and they had an extra suitcase which we had no place for. Since real estate is a premium in Bombay, I had the brilliant idea of sticking the empty suitcase in the trunk of my car. For 5 months we visited pretty much every hotel and/or mall that had security and NOT ONE person questioned what was in the suitcase. They opened the trunk looked at the suitcase and then proceeded to shut the trunk. If the government was truly concerned about it’s citizens it would not let private companies conduct security checks and instead use the military as it does for the airports. This decision allows the government to save money but puts the public at risk and in the end, people die.

A politician first and foremost should be doing everything to take care of people in his/her district, but in reality they are more worried about taking care of themselves first. Another great example are the roads in Bombay. Building roads is a fairly simple thing and is done around the world and other parts of India without an issues. However, for some strange reason the roads in Bombay are always in a state of disrepair, of course corruption plays a part. If the cost of the road is Rs. 100, by the time the road is completed only Rs. 5o might have been spent on sub-standard materials, the rest is classified as “leakage”. When roads are so badly constructed it could be a death trap or lead to a serious injury for someone that is riding on a motorcycle and happens to hit a pothole. If you hit that pothole and are taken to a government hospital, let’s just say I wouldn’t even send my worst enemy to a government hospital for treatment. Yet again, the mixture of money and disregard for life creates an environment where government hospital facilities are on par with hospitals from when dinosaurs roamed the earth. In the end, people die.

You get the point, I could go on and on with examples. So what do we do? We create our own bubbles. Who cares if the building we live is filthy, as long as your home is clean. Who cares if people are begging on the street, you are sitting in an air conditioned car. Who cares if someone’s office got bombed, you and your staff are safe.

The problem with bubbles is that they can pop at any moment. When it pops who will help you? The government or will your strength, courage and resilience pull you through.