The Telegraph
Monday , August 21 , 2017

Promoter puzzle for Infosys

- After deep divisions, suspense on how Murthy will deal with Rao

Aug. 20: The promoters of Infosys, who together hold 12.75 per cent of the equity in the company, have been deeply divided over outgoing CEO Vishal Sikka for more than a year.

The big question now is: Will they rejoin ranks after Sikka's exit as a major crisis engulfs the $10-billion software giant?

The great divide was apparent at the June 24 annual general meeting when only 57.49 per cent of the 292.8 million shares held by the promoters were voted in favour of accepting the financial statement for the year ended March 31.

There were no votes against the resolution - but the sullen silence of the remaining 42.5 per cent promoter holding was indication enough of how deep the resentment against Sikka ran.

This divide in the promoter group's ranks was even more apparent when voting results indicated that Sudha Murty, wife of Infosys founder N.R. Narayana Murthy who has been slammed by the board for his relentless campaign to oust Sikka, had voted in favour of the controversial board-sponsored resolutions in March 2017 to grant U.B. Pravin Rao a 35 per cent pay hike.

In March 2016, she, along with co-founder Nandan Nilekani and his family, had similarly voted in favour of Sikka's reappointment and the appointment of Punita Kumar Sinha as a director - both of which Narayana Murthy bitterly opposed on the grounds of corporate governance ethics. (See The Telegraph, The '70,773,220' Infy clue, April 5, 2017.)

Sinha is the wife of Jayant Sinha, minister of state for civil aviation in the Narendra Modi government, and a top-notch financial professional in her own right.

The opportunity for the promoters to present a united front will come soon enough when the shareholders vote on a special resolution to endorse the board's decision last Saturday to buy back 11.3 crore shares at Rs 1,150 a share through the tender offer route. This resolution needs to be approved by 75 per cent of the shareholders who vote.

The share buyback programme - on which there ought not to be any major differences - is part of the capital allocation policy that was announced on April 13 under which the Infosys board headed by R. Seshasayee promised to pay out up to Rs 13,000 crore, equivalent to $2billion, to the shareholders during the financial year 2017-18.

The company has opted to return this entire sum to the shareholders through the buyback programme.

But it is time to ask whether this is the best possible way to return money to the shareholders of Infosys.

A share buyback benefits shareholders who choose to return either a part or their entire holding in response to the buyback offer.

Technically, this means that the real beneficiaries will be the exiting shareholders, and there could be many who will now decide to take the money and run. The 24.5 per cent premium to Friday's closing price of Rs 923.10 on the Bombay Stock Exchange - a steep 10 per cent fall after the shock announcement - will be inducement enough.

In an ideal situation, a share buyback should also benefit shareholders who do not tender their shares in response to the offer. This is because the bought-back shares - in this case, 113,043,478 shares representing 4.92 per cent of the company's paid-up share capital - must be destroyed within seven days after their repurchase.

If the outstanding stock of shares goes down, the scrip ought to rise on the bourses. The stock may rise on Monday but it will remain vulnerable to the flow of any disquieting information.

The company might have opted to pay out the money in the form of dividends if it hadn't been for the Modi government's decision to re-impose the tax on dividend receipts, which effectively transferred the onus of tax from the company to the recipient.

Infosys is peering into an uncertain future after Sikka's resignation. There is no certainty that it will be able to find a leader with Sikka's credentials by March next year.

Ravi Venkatesan, co-chairman of Infosys, had acknowledged as much when he said it might be hard to find an external candidate of similar calibre in the current environment.

That might force Infosys to name Pravin Rao - who has been with Infosys for close to 30 years - as Sikka's successor.

But this could open up another can of worms.

Murthy had bitterly opposed Rao's pay hike. After Rao's compensation had been approved by shareholders, Murthy had issued a letter in which he said: "Giving nearly 60 to 70 per cent increase in compensation for a top-level person (even including performance-based variable pay) when the compensation for most of the employees in the company was increased by just 6 to 8 per cent is, in my opinion, not proper."

He had added: "With what conscience can a decent person like Pravin (a man schooled in Infosys values for over 30 years) tell his juniors that they should work hard and make sacrifice to reduce cost and protect margin?"

One must remember that at the AGM in June, the board had moved an ordinary resolution seeking to appoint Rao as a director, which received an endorsement of only 57.5 per cent from the promoter group - the same number of votes that were cast in acceptance of the financial statement.

In one sense, Rao's approval rating has risen among promoters - from 24.17 per cent In March during the vote on his pay hike to 57.5 per cent at the AGM.

If Infosys now reverts to a culture of parsimony, Rao may be forced to take a pay cut - if for no other reason than to soothe the Infosys founder, secure his blessings and get a ringing endorsement from the promoters, which the company sorely needs to stop the drift.

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