Microfinance Booming segment interests lawyers and law firms

Of late, microfinance has become the new hotspot, not only as a sector, but an interesting area for lawyers and law firms. With SKS becoming the first Indian microfinance company to tap the capital markets, law firms are bound to benefit from this sector..According to the Microfinance India State of the Sector Report 2009, there were approximately 76.6 million microfinance accounts in India as of March 2009; and the total microfinance sector loans outstanding were approximately Rs. 35,900 crore ($80 billion). The Reserve Bank of India (RBI) has also identified growth of the microfinance sector as an important element in achieving a broader national goal of making financial services accessible to an increasing proportion of the population. Off late, microfinance has become the new hotspot, not only as a sector, but an interesting area for lawyers and law firms..Bar & Bench spoke to Sandeep Farias, Managing Director of Elevar Equity, a private equity fund that invests in a host of social enterprises such as microfinance and education. Sandeep is a lawyer and has worked with Nishith Desai & Associates, “While working at a law firm, I always wanted to be where the real action was and not just be in advisory related work. I was looking to make a greater impact through my work and what other area than microfinance? The best part of my job is that I can see, week on week, our investments change several lives and all of it in front of us”, says an excited Sandeep..Bar & Bench also spoke to Kartikeya Singh, who used to work at AZB & Partners as an Associate and later quit to join IFMR Capital. Kartikeya says, “I could use my experience as a lawyer and make an impact on thousands of lives. Also, IFMR Capital provided this unique opportunity where we were securitizing microfinance loans, which was unique in India”. Both Sandeep and Kartikeya were at different stages of their legal careers in the country’s top law firms who quit their high profile law firm jobs to take up microfinance jobs..Elevar works closely with Trilegal and IndusLaw, while IFMR Capital works with most Indian law firms including JSA, AZB, Amarchand, Poovayya and K Law..Srinivas Katta, Partner at IndusLaw says “Microfinance has turned conventional legal wisdom on its head”. What he means is that most of the microfinance activities do not involve lengthy legal procedures or have high security enforcement proceedings. We always believed strong documentation is a must for protecting and insulating one’s risk in the lending business. Yet the microfinance institutions have high recovery rates when compared to banks and NBFC’s. No wonder this segment has seen so much interest by foreign investors..Earlier this month, IFC invested in Utkarsh Microfinance to take 14.5 percent in the company. Further, Bangalore based Janalakshmi also recently received a $10 million (Rs. 45 Crore) funding from Treeline Asia. AZB & Partners were the legal advisors involved in these transactions. Delhi based Partner Gautam Saha advised IFC while Bangalore based Partner Srinath Dasari advised Treeline Asia..When we questioned Srinivas Katta, whose firm IndusLaw has completed several microfinance transactions on behalf of Elevar Equity and Units and also represents microfinance companies such as ASA, on whether the time has come to set up niche practice for microfinance, he says “The time has probably come”. Currently, the legal work largely centers around “micro-credit companies” and relates to “capital raising, debt funding from outside India, listing of debt, transformation from not for profit to for profit enterprise”..In the next few years, there is likely to be a significant increase in work in these areas. In addition, it is likely that legal work in transactions such as securitization, listing of equity, setting up funds, exits, etc. will increase in the near future. Further, as microfinance companies start offering more and more services, in addition to the traditional micro-credit work, there is likely to be a change in the nature of legal inputs required..In today’s microfinance market, majority of law firm advisory is centered on advising microfinance companies to raise capital. Even at this stage there are two levels in which a law firm gets involved – one at a transformation stage i.e. to convert the society or trust into a company and the second is the actual event of raising capital..Kartikeya Singh of IFMR Capital, which may be the only institution that specializes in microfinance bundled loans, says “We are tapping newer markets like the mutual fund industry and are waiting for the new securitization policy is to be unveiled by RBI and are hoping that it would lead to innovative products where microfinance papers can be sold to new investor classes such as pension funds and insurance companies”. “The problem today is that most microfinance loans are for a year and to structure a longer duration product for these pension funds and insurance agencies becomes difficult” says Kartikeya..The microfinance market in India reaches only 5 percent of the population while there is a demand for more than 50 percent of the population. Most law firms are advising several private equity funds to invest in these institutions; however, they are yet to scale up practice to specifically cover this segment. With SKS becoming the first Indian microfinance company to tap the capital markets and with the likes of Narayana Murthy investing in this sector, law firms are bound to benefit from this sector.