The proposed deal between Singapore’s sovereign investor, Temasek Holdings, which has been active on the India deals front in recent weeks, and Hyderabad-based microfinance entity Spandana Sphoorty Financial Ltd (SSFL) is likely to be called off soon, VCCircle has learnt.

Temasek as recently as yesterday said it would buy 5% stake in the National Stock Exchange from NYSE while it announced an investment of $200 million in GMR Energy last month.

Temasek’s deal negotiations with Spandana have been going on for some time now. In September 2009, SSFL proposed to raise about $60 million or Rs 300 crore from Temasek Holdings by diluting stake less than 10%.

Spandana, it appears, is now looking at other ways to raise capital and yet preserving promoter holding, a source said. Promoters hold nearly 50% stake in Spandana. With peer SKS Microfinance planning to test the IPO waters, Spandana may choose to wait for the outcome before plunging into a significant capital-raising plan involving dilution in promoter holding, a sector observer said.

Spandana founder and managing director Padmaja Reddy told VCCircle, “We were in negotiations with Temasek during the last financial year. Relations with Temasek are cordial and we value them as sovereign investors. In terms of exact deal with Temasek, we respect the confidentiality of our engagement. The long conversations do not necessarily reflect a delay but also reflects how much time is invested in getting the mission alignment with new investor and right terms of engagement, including valuation.” Due to reasons of confidentiality, we would not be keen on sharing details for public consumption, she added. A mail sent to Manish Kejriwal, senior managing director, Temasek, did not elicit any response.

At the same time, she did not rule out future fund-raising plans. “Fund raising plan is a work in progress item for us and we would continue to evaluate all options and opportune timing for exercising those options including – PE funding, IPO, sub-debt etc,” she added.

“Capital is essential for us to safeguard us from any future risks/shocks besides helping in growth. Spandana has been using multiple financing options like sell down of portfolio to conserve capital. Spandana continues to have a robust capital adequacy (of >20%) based on operational efficiencies and portfolio quality delivering good numbers even without taking any additional capital,” she said.

Spandana currently has over 3.9 million clients with a portfolio of Rs 3,150 crore under management. It has raised several rounds of funds in 2009 through venture capital and debts to spearhead its growth. Earlier in July 2007, the company raised Rs 49 crore ($12.25 million) from JM Financial India Fund and Lok Capital by diluting 20% and 5% stakes respectively. It had raised $22 million from Valiant Capital by diluting about 11% last year. It also raised Rs 50 crore ($12 million) funds from Rabo India as debt and another Rs 80 crore through the issue of non-convertible debenture last year.

In February, Spandana placed Rs 25 crore worth of commercial paper with a leading mutual fund to reduce the cost of borrowings. "It invokes the interest of money market players into this sector, enabling the microfinance players to raise to the stature of Indian corporate houses. We expect to do more such deals with other investors in the days to come,” Padmaja Reddy had said then.

The sector’s rapid growth, at a CAGR of 105% annually in the last five years, has made it an attractive bet for PE players. According to VCCEdge, since 2001, about 77 deals worth $1.56 billion were signed in microfinance space in India. About eight deals were signed in 2010 till date worth $88 million. Among the top deals, Bhartiya Samruddhi Finance Ltd raised $26.33 million from various investors including Lok Capital and Matrix Partners while Equitas Micro Finance raised $24 million from Aria Investment Partners. In 2009, about 16 deals were signed in the MFI space.

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