MICROCAPITAL.ORG STORY: CEO of Aavishkaar India Micro Venture Capital Fund Vineet Rai Expects Merger And Consolidation Of Indian Microfinance Institutions To Increase

The CEO of Mumbai-based Aavishkaar India Micro Venture Capital Fund (Aavishkaar) [1], Mr Vineet Rai, was recently quoted as stating that “consolidation would become necessary for MFIs which are large in size while those smaller MFIs work at the grass roots level and hold the key to engage the borrowers. Here, the big MFIs would prefer to take over the district and semi-urban MFIs to get access.” [2] Aavishkaar was established on 22 May 2002 and aims to support rural and semi-urban entrepreneurs in India by through appropriate financial investment and by providing management support, professional expertise and other resources. According to information on its website, Aavishkaar looks for start-ups and functioning enterprises that impact the average rural or semi-urban Indian and offers financial solutions to enterprises that meets its investment criteria. The idea is for Aaviskaar to help these enterprises become self-sustaining or to be in a position to obtain funding from larger institutions.

Aavishkaar’s parent company, Aavishkaar International (“Aavishkaar International”), is incorporated in Singapore. Aavishkaar International has been set up to aggregate individual investments and then remit them to Aavishkaar. Aavishkaar has been registered as a Trust under the Indian Trust Act, and has been authorized to act as a venture capital fund by Securities and Exchange Board of India (SEBI) [3]. To date, Aashkaar has raised approximately USD 35 million and has made 22 investments, of which 17 have been in rural ventures.

Mr. Rai stated that large and national MFIs would look to acquire local or regional MFIs which have proven management skills and access to remote corners of the country. On the funding front, he believes that there will be inflows of about Rupees 10 billion (approximately USD 210 million) from investors in the coming year. He added that new instruments such as non-convertible debentures or securities will be attractive particularly if they can deliver returns in the range of 20 to 30 percent, as has been the case on previous occasions.

Mr. Rai’s views have generated some comments on the Microfinance Focus portal [4]. Among the questions raised was why merger and consolidation activity has been relatively uncommon in the microfinance sector. A commentator identified only as ‘Peter’ highlighted the possible reasons for this including the lack of transparency about ownership and the legal status of MFIs. Mergers can only be successful if the merging parties can effectively share reliable performance data, a factor which may be challenging particularly for MFIs that are loosely regulated, if regulated at all. The lack of accountability and poor governance can also impede successful mergers in the microfinance sector. ‘Peter’ added that foreign donors and international institutions that undertake to support the consolidation and merger of MFIs may be subject to specific deadlines and spending pressures, which may not be appropriate motivations in this regard. Another commentator known as ‘Clay O’Brien’ added that the lack of merger activity may also be attributed to the scarcity of deal data and information that would facilitate fair valuations in a merger. Pricing is complicated enough in conventional commercial mergers but can be more difficult where the valuation is in respect of an MFI with a complex history. In addition, there are ‘social’ issues that arise where MFI founders are reluctant to sell, even at a good price, having invested many years of hard work into the MFI. Mr O’Brien added that external advice in relation to valuation from experts would be most helpful for the merging parties.

Consolidation and mergers in the microfinance sector have been covered in previous Microcapital.Org publications. These are referenced in the ‘Bibliography’ section below [5] – [8].

By Chinq Yee Chong, Research Assistant

Bibliography:

[1] Aavishkaar India Micro Venture Capital Fund: www.aavishkaar.org/

[2] Article entitled ‘Indian Microfinance On The Verge Of Consolidation: CEO Aavishkaar’ on Microfinance Focus portal: http://www.microfinancefocus.com/news/?p=568

[3] Securities And Exchange Board of India: www.sebi.gov.in/

[4] Microfinance Focus information portal: http://www.microfinancefocus.com/

[5] PAPER WRAP-UP: A Closer Look at Consolidation: The Sonata-Jeevika Acquisition, by Akhand Tiwari and Michael Chasnow

[6] MICROFINANCE PAPER WRAP-UP: “Setting Standards and Sticking to Them: When Microfinance Network NGOs Decide to Exit,” edited by Elissa McCarter and Andree Simon

[7] MICROCAPITAL STORY: Consolidation of Indian Microfinance Institutions Expected

[8] NEWS WIRE: China: Regulators to Encourage Acquisitions, Mergers of Rural Financial Institutions