How Infosys became the darling of investors

On 14 June 1993, a Bengaluru-based company, with a little over $5 million in annual revenue and fewer than 250 employees got listed.

Infosys Ltd ended last year with $10.94 billion in revenue and a workforce of 204,107. In the 25 years since 1993, it has not only rewritten the corporate governance norms for all listed firms but also democratized wealth creation among shareholders and employees, changing the way business is done in India.

“The biggest takeaway from Infosys’s listing was that it showed to Indians that a few ordinary people, with no powerful background and rather simple middle-class upbringing, can set up a great company and on a global scale,” said T.V. Mohandas Pai, a former human resources head and chief financial officer of the company.

Pai joined Infosys as a consultant in January 1994, six months after the company went public.

“I believe when it comes to corporate governance and disclosure norms, Wipro is a surrogate for Independent India and Infosys became the proxy for post-liberalized India,” said Shankar Jaganathan, founder of CimplyFive Corporate Secretarial Services, a tech solution provider for compliance standards.

“In fact, Sebi’s report on corporate governance takes source from much of the practices followed by Infosys during the early years from 1995 until 2000,” said Jaganathan, also the author of the book, Corporate Disclosures: The Origin of Financial and Business Reporting.

The listing of Infosys, which was set up in 1981 by N.R. Narayana Murthy and his six friends, took place at a time when the country had just begun opening itself to foreign investors. Up until then, foreign investors were not allowed to hold shares in Indian companies; markets regulator Securities and Exchange Board of India had just been set up in 1992, and the stock markets were still reeling under the $1 billion banking and securities fraud by stock broker Harshad Mehta.

Three months before Infosys’s listing, on 12 March 1993, a series of bombs exploded one after another at several places in Mumbai, including the Bombay Stock Exchange. They had been planted by terrorists who intended to avenge the destruction of Babri Mosque in December 1992 by Hindu nationalists.

Investor sentiment was tepid, and shareholders, like most people in the country, were still not clear about what Infosys actually did.

“Infosys listing was a seminal moment. This despite people not knowing about the company and its IPO (initial public offering) almost having flopped,” said Shriram Subramanian, founder and managing director of proxy advisory firm InGovern Research.

Infosys’s IPO was undersubscribed but Morgan Stanley bailed the company by picking up 13% of equity at the offer price of ₹95 per share. Infosys shares opened at ₹145 a share, almost a 60% premium on the day of listing.

However, the management’s relentless focus on transparency and disclosures, on the back of the company reporting consistent growth, year after year, soon made Infosys the darling of investors. In 2000, Infosys even became the second-most valuable company in the IT index, behind Wipro.

Firstly, Infosys’s focus on corporate governance norms made many large foreign investors and analysts take note, which in turn made other companies borrow from some of its initiatives.

“At a time when there were no norms for appointment of independent directors, Infosys started disclosing governance policy, the board charter, the attendance of board members, the qualification and remuneration paid to its board members,” said Jaganathan of CimplyFive.

“In the subsequent years, under Murthy and CFO Mohandas Pai, Infosys redefined accounting, disclosure and corporate governance standards. It was the first company which shared a sustainability report, first to reports its accounts in US GAAP accounting standards. All these disclosures were a breath of fresh air and certainly, the company caught the eye of foreign investors too,” said Subramanian of InGovern Research.

Infosys also put in place a whistle-blower policy, articulated rules to limit insider trading and formed an independent board committee to oversee best practices. All of this was then unheard of at most other listed companies.

Secondly, Infosys became the first listed firm to articulate a financial policy with investors, stating the management’s aim was to generate a return on capital (RoC) that was twice the cost of capital and three times the cost of capital deployed. The management started meeting analysts every quarter and, beginning 1995, started giving a yearly revenue growth outlook, another first.

Infosys also showed other companies that its employees and shareholders were at the heart of business as it democratized wealth creation among both employees and shareholders. Employees held 13.6% of shares in 1992 and with the introduction of an employee stock option scheme in the subsequent years, many of the company’s over 18,000 employees who held shares became dollar millionaires.

Finally, Infosys changed the way companies did business in India.

“It changed the way companies looked at employees. Infosys did not have separate canteens or lifts or restrooms for senior management and junior employees,” said Pai.

Ironically, the Infosys board came under a cloud over alleged poor corporate governance in the 18 months to August last year. And Murthy’s repeated lambasting of the board over the matter led to CEO Vishal Sikka and chairman R. Seshasayee resigning.

Link: Mint – June 12, 2018