Aug. 19: The threat of a class action lawsuit in the US hung over software giant Infosys even as its board of directors approved a Rs 13,000-crore share buyback offer on Saturday which is expected to stem the almost 10 per cent slide in the stock after CEO and MD Vishal Sikka's shock resignation.

Four US law firms - Bronstein, Gewirtz & Crossman; Rosen Law Firm, Pomerantz Law Firm, and Goldberg Law PC - have said they are investigating potential claims on behalf of Infosys investors in the US to determine whether the $10-billion software giant and some of its top officials violated federal securities laws in the US by failing to make proper disclosures relating to certain events.

The US investors hold American depositary rights (ADRs), which are listed on the Nasdaq. The ADR sank 7.16 per cent to $14.79 on Friday, mirroring the fall on the Indian stock markets.

Rosen said in a statement that it is investigating "potential securities claims" on behalf of Infosys shareholders arising from allegations that the firm may have issued materially misleading business information to the investing public. It added that it is "preparing a class action lawsuit to recover losses suffered by Infosys investors".

Bronstein and Goldberg said their investigations concern whether Infosys and certain officers and/or directors have complied with federal securities laws.

Pomerantz said its investigation is to ascertain whether Infosys and some of its officers/directors have engaged in securities fraud or other unlawful business practices.

Sikka has faced accusations over certain improprieties relating to Infosys' acquisition of Panaya Inc and Skava Systems Pvt Ltd in 2015. There were two whistleblower complaints against the buyouts that prompted the Infosys board to appoint two US firms - Gibson, Dunn and Crutcher LLP, and Control Risks - to investigate the charges against Sikka and other officials.

There were also accusations relating to the exit of former chief financial officer Rajeev Bansal who had opposed the buyouts. Bansal was given an unheard-of Rs 17.38-crore severance package which led to fresh charges that the payout was meant to buy his silence. The board later froze Bansal's package at a little over Rs 5 crore, prompting the former CFO to press for arbitration.

Gibson, Dunn and Crutcher gave Sikka a clean chit and said there was no evidence of any conflict of interest or kickbacks. However, Infosys founder N.R. Narayana Murthy has been insisting that the full report should be placed in the public domain.

On Friday, the board once again rejected Murthy's plea for a full public disclosure of the report as it "would compromise the confidence of the employees that they could report honestly, openly and candidly to the company in any future investigation or legal matter".

First buyback

On Friday, the Infosys board approved a proposal to buy back 11.3 crore shares at Rs 1,150 a share through the tender offer route.

This is the company's first share buyback in its 36-year history. A share buyback is one of the ways to boost shareholder returns especially when its ability to pay out dividends is crimped by weakening performance.

A buyback committee has been formed to oversee the whole operation. It will be headed by co-chairman Ravi Venkatesan and includes outgoing CEO and executive vice-chairman Sikka and interim CEO U.B. Pravin Rao.

Shares purchased through a buyback must be extinguished within a period of seven days, thus reducing the number of shares outstanding in the market. This usually props up the stock price.

There are several reasons why companies buy back shares: improve the earnings per share, return surplus cash to shareholders, and prop up the share price in a sluggish market.

On Friday, the Infosys stock fell almost 10 per cent and wiped out more than Rs 22,500 crore of shareholder wealth.

Compared with the closing price of the Infosys scrip of Rs 923.10 on Friday, the buyback price represents a premium of almost 25 per cent. However, if one were to exclude the extraordinary event on Friday and compare the price of Rs 1,150 to its closing price on Wednesday when the company informed the bourses that the board would consider a share buyback option, it marks a premium of 17.73 per cent. This is in line with what peers like Tata Consultancy Services and HCL Technologies had offered. TCS, it may be recalled, had announced a Rs 16,000-crore share repurchase in April.

Infosys said that the buyback size is 4.9 per cent of its equity capital and that the record date (which will decide who is eligible to tender the shares) for the buyback will be determined in due course.

The company will have to move a special resolution to seek shareholders' approval for the buyback. Under the provisions of the Companies Act, a special resolution must be passed by 75 per cent of those voting.

A crucial element in the buyback process is the acceptance ratio that signals how many shares a firm will accept for every 100 shares tendered by shareholders.

Initial estimates by analysts say that in the case of Infosys the acceptance ratio for retail investors is around 5 per cent, which is higher than the 3 per cent in the case of the TCS buyback.

Given the current developments, market circles expect both retail and institutional investors to tender a part of their shares in response to the buyback offer.

Infosys, which has cash reserves of over $6 billion, has been under intense pressure to return a part of this idle cash to shareholders either through a buyback or a dividend. Some of its former executives had earlier written to the board seeking a buyback to protect shareholders' interests.