infosys-problem

Infosys is one of the best known brands in the country. The Bengaluru-based multinational provides IT services and is an outsourcing major. It is the second largest IT company in the country with a market capitalisation of about US$34.38 billion. Known for its employee-friendly environment and work ethics, Infosys has hitherto remained in the news for only the right reasons. Over the past week, however, the company has been in the grip of a crisis, a corporate battle between the founders and the board of directors, that has started to worry stakeholders.

Money Matters

News reports revealed that NR Narayana Murthy, founder and former chairman of Infosys, along with Nandan Nilekani and S Gopalakrishnan, two other co-founders of the IT giant had written in to the board questioning the rather sharp spike in the compensation package offered to the company’s Chief Executive Officer (CEO), Vishal Sikka, and the hefty severance paid to two other top-level executives who have now left the corporation.

CEO Sikka’s compensation is pegged at about US$11 million, up from around US$7.08 million, a year ago. Not only is this among the highest drawn by an Indian CEO, it is also about 935.38 times the median salary of Infosys employees, according to the Economic Times. While Murthy and Sikka continue to share cordial relations, it is Sikka’s compensation that has drawn flak from the founders.

The Panaya Acquisition

One of the main objections raised by Murthy was with regard to former CFO Rajiv Bansal’s severance pay. Bansal had been given 24 months’ salary as severance pay in 2015. He said that there has been a clear fall in the standard of corporate governance at Infosys. Pointing to the fact that former CFOs Mohandas Pai and V Balakrishnan were not offered any severance pay, he questioned the decision of Chairman R Seshasayee (along with that of Independent Director Jeffrey Lehman’s, who looks after remuneration) to offer Bansal a sizeable package.

To understand this, we need to look into the background of Bansal’s exit. Former Infosys CFO Rajiv Bansal is believed to have opposed the company’s acquisition of Panaya, a provider of automation technology at US$200 million — almost six times Panaya’s revenue. Murthy seems to be concerned that the severance could be looked upon as “hush money”.

Independent board member Roopa Kudva said that the company had important lessons to learn from Bansal’s exit and had reworked severance pay contracts of its employees.

Founders Vs. Board

Apart from Narayana Murthy himself, former Infosys directors, T V Mohandas Pai and V Balakrishnan, also criticised the actions of Chairman Seshasayee and asked him to resign over alleged governance issues. While the company remained tight-lipped over the Chairman, it stands firmly in support of the CEO Sikka.

Sikka, who will be meeting the investors of Infosys today expects a high participation. Stakeholders are keen to hear about the issues raised by Murthy from the CEO himself.

The Infosys board has brushed aside Murthy’s allegations of failing governance and compensation woes. The board also appointed a law firm to communicate and engage with the founders and promoters of Infosys over disclosure issues. Corporate governance experts have also been roped in to advice the board.

While CEO Vishal Sikka said that despite the distraction caused by the current corporate crisis, Infosys remained firmly committed to governance, to rules, and to its core integrity. Board Chairman, Seshasayee, issued a statement that said, “The board is fully aligned with the strategic direction of Vishal Sikka and is very appreciative of the initiatives taken by him in pursuance of this transformation”.

A Look At The Stakeholders

To understand what say the founders and promoters of Infosys hold in the company’s decision-making mechanism, let us take a look at the stock holding of the company. As of December 31, 2016, 39.02 percent of the company’s stock was owned by foreign portfolio investors. The largest among these is the Government of Singapore Investment Corporation, which holds 2.4 percent stake. Next comes OppenheimerFunds with 2.13 percent stock holding and Abu Dhabi Investment Authority with 1.77 percent holding. Vanguard holds 1.27 percent of the shares.

Promoters and promoter groups (including Murthy) hold about 12.75 percent of the Infosys shares.

Insurance companies of India hold 11.26 percent of the Infosys stock. The two largest holding here belongs to the Life Insurance Corporation of India (6.61 percent holding) and ICICI Prudential Insurance with 1.22 percent stock.

Mutual funds come next with a stock holding of 7.42 percent. This includes HDFC Trustee Company with 1.47 percent stake and ICICI Prudential Value Fund with 1.18 percent stake.

So we see that while the promoters and founders of Infosys may be far from being the largest stakeholders, their opinion is still a significant one.

Infosys Still A Good Buy

The boardroom drama at Infosys could not have come at a worse time. The entire IT industry of India is keenly following US President Trump’s moves on the immigration policy and any changes in America’s visa regulations could severely hurt Infosys, which earns a great deal of revenue by servicing its overseas clients (particularly from the US).

Murthy’s move to end the founders vs. board battle in a press conference on Friday may help. Despite this, analysts believe that Infosys remains a good scrip to buy given its strong fundamentals. In fact, Infosys has undergone a good amount of correction over the past year and is unlikely to fall any further. Infosys stock was trading at Rs 984 by the close of markets on February 13, 2017 (NSE).