When an unprecedented crisis struck the Indian microfinance sector in 2010, Spandana Sphoorty was among microfinance institutions (MFIs) that was hit badly and was admitted to the corporate debt restructuring (CDR) cell, but founder Padmaja Reddy managed to get the company back on track over the next few years. Spandana survived the crisis but things never remained the same after the entry of new investors following the CDR.
A decade after the 2010 crisis, the microlender is back in the news, this time for its own internal issues. In early November, Reddy quit the firm alleging that the board didn’t extend her contract. Reddy also said she opposed selling the microlender at a throwaway price to Axis Bank.
In an exclusive interview with Moneycontrol, Reddy spoke about a range of issues including her controversial exit and the way ahead. Edited experts:
You still have about 17 per cent stake in Spandana.
Yes, I still have a 17% stake in the company. When I came to know that they (the Spandana board) had no intention of renewing my contract, I said things have come to a stage where I don't think we can work together anymore. I told them I have only two options-- to buy the total stake of (majority shareholder and private equity firm) Kedaara Capital or sell my stake to them. But I said I don't have the capability to buy a 45% stake in the company. I said I cannot buy your stake, but you can buy my stake. I offered to sell my entire stake to them (Kedaara) so that they can run the company the way they want to. But they said no, we cannot buy your stake. I told the board—I told Kedaara—that I don't think there is any value left out there. I believe there is zero value left.
Why do you think there is zero value left in the company?
When the going was good, lenders used to ask me, how is Kedaara helping us? I always used to answer that they're a private equity fund, they don't know how to manage businesses and how to manage a company. Unfortunately, today, they have taken this on. I don't know how well they can manage this business. And whatever the decisions they have taken, particularly in the recent three or four months, I'm not really getting any hope that they have the capability of growing this company.
What was your stance?
I basically said, let us not disrupt the structure. Let us hire a full-time CEO and I will continue as a managing director and guide the team because all my experience—23 years of experience in microfinance—is only with Spandana. So who else can guide the team better than me, because I know this organisation, I know the culture, I know everything, but they have taken a call in terms of not renewing my contract.
What according to you was Kedaara’s approach?
They never wanted to manage this business. They never wanted to grow this business. They were very, very clear that they will sell the company to Axis Bank. And in a month or two, they can do so. I don't know what Axis Bank is thinking considering what has happened in the company. I was fighting saying the valuation is very low and the company is doing far better and every shareholder deserves a better valuation. But in the current situation, if they do the Axis Bank deal, that is good for every investor. Because in the last two months the stock corrected by almost 30%. So even getting Rs 700 per share is good for every shareholder.
What is your view on the proposed top hirings in Spandana?
We all know what happened at IndusInd Bank. These two people only (Shalabh Saxena and Ashish Damani, CEO and chief financial officer at Bharat Financial Inclusion Ltd, an IndusInd subsidiary) created a mess out there. Without the borrowers’ knowledge, they created some 80,000 loans. And again, in the last two months, there are multiple press releases saying that these guys are joining Spandana. It is more surprising today to see IndusInd Bank responding that these guys are working with us (IndusInd) as the CEO and managing director and CFO. They have not even resigned. So they cannot accept any offer which is in violation to their contractual terms.
Is Spandana getting into a conflict with IndusInd Bank?
I don't know why they (Spandana) got into a conflict with me. So now they are getting into a conflict with a bank also. Lenders should be convinced about all decisions of a company. For us, cash is a raw material. So generally, every month we used to raise Rs 1,000 crore to Rs 1,500 crore. From November 2 to till date, they have not raised even a single rupee debt.
What is your take on the present lending operations at Spandana?
Since the disbursement came to standstill, they have not disbursed even one rupee in November. Again, the Rs 8,000 crore portfolio has already gone down to some Rs 6,500 crore or Rs 6,000 crore. So the portfolio is running down, the top-line is running down.
There is talk that you had clashes with Spandana’s company secretary.
He's a good-for-nothing person, a completely useless guy, kind of like a drunkard. Basically, when the whole episode was happening, this guy became a kind of insider for them (Kedaara) to see when I came to the office, when I left the office, whether I'm still sitting at the workstation or if I'm in the boardroom.
(Responding to this comment, Spandana Sphoorty Board in an email response said: “We cannot dignify personal attacks on individuals with a comment.”
Do you think being sold to Axis Bank or any other entity is the only option for Spandana now?
No, not at all. That is not the only option. They wanted to sell to Axis Bank and I said no to that. Then Kedaara said they cannot sell their stake in a block deal since the stake is too big. They convinced me that we have to sell the company to get a better valuation. I was convinced and said yes, they went ahead and appointed JPMorgan Chase as banker. So there were discussions on due diligence after that…
You didn’t agree on the valuation front...
I said I'm not happy with the valuation because SKS (the microlender which is now Bharat Financial Inclusion) was acquired at 4.75 times book value multiple. Recently ICICI (Bank) invested in Midland (Microfinance); they took a 10 per cent stake in the company that also happened at 3.5 times book value multiple. I asked, why are you selling this company at 1.6 times? Public market investors like retail investors, they invested at Rs 860 per share and after two normal quarters, the stock price went up to Rs 1,400. And again they were prepared to sell for Rs 700 per share. So I raised an objection and said that I’m not losing my stake.
What is the ideal valuation for Spandana Sphoorty according to you?
We should get 4 or 4.5 times (book value) at least because for Kedaara there is no loss. They invested Rs 400 crore of pre-money value. So even if they're getting Rs 4,500 crore it is like 11 times. But again, the other investors who invested during the IPO (initial public offering), they invested at a valuation of Rs 5,000 crore. These guys were prepared to sell the company at Rs 4,000 crore or Rs 4,200 crore valuation, for a loss. So those shareholders were all incurring losses.
Is it the end of the road for you at Spandana?
Yes. I have absolutely no intention of coming back to Spandana. Not at all. I’ve never had any hope. Everything is over. I left and I resigned, I got relieved by the board. And I'm looking at other options outside Spandana.
Were you ready to continue at some point?
At one point, I had agreed to continue as managing director and I said we will appoint Shalabh as the CEO, and I will restrict myself only to the strategic decisions and also the overall monitoring. But Kedaara said that was not okay.
What was your proposal?
A company can have two managing directors. I can be the co-managing director and he can be the managing director, and he can focus on business. And in any case, Shalabh has zero experience in terms of accounts, finance, fundraise, IT and all. (I suggested that) I will take care of those divisions and let him focus on business, HR, the core business. He can be the managing director, I don't have any problems in terms of being the co-managing director. Other than this, I was not able to think of anything else.
Is the discussion still on?
No, the discussion is over.
Why do you think Kedaara wants to exit at this point?
When we were exiting from the CDR, that was the time that these guys (Kedaara) invested. At that time, our AUM (assets under management) was just Rs 1,000 crore. In four years, I had grown that book to Rs 8,000 crore. Once they realized they got whatever they wanted, (they decided) now is the time to exit. Their only objective was to sell the company.
What is next for you? You're a senior microfinance industry veteran in India.I have my team with me. We are exploring and we are planning. We are in the process of promoting an NBFC (non-banking financial company), not MFI, but an NBFC. It’s not because I have a non-compete clause and all that. While all my life I worked in microfinance, we are thinking of doing something else. This new NBFC will focus on secured loans—loan against property, gold loan and so on. It was incorporated on November 15.