Questioning the Infosys Shareholders

Shareholder activism is emerging from Infosys founders as well as a couple of past executive directors of the IT firm

Companies across the world issue shares with differential rights. The garden variety shares are known as “ordinary shares”, investing all shareholders with equal rights to ownership and profits. Then come shares with varied rights, including non-voting shares. In India, Tata Motors and Gujarat NRE Coke, among others, have issued non-voting shares; these shares allow companies to raise capital without diluting promoter shareholding. If events follow a certain trajectory, India could soon witness differential rights even within ordinary shares.

The epicentre of this development is software company Infosys Ltd, where a section of shareholders is publicly airing grievances against the current management led by Vishal Sikka and board of directors chaired by R. Seshasayee. The protesting shareholders have an urgent petition: a public review of severance packages offered to two departing senior executives, and returning part of the company’s cash reserves to shareholders. They’ve also flagged concerns over the chief executive officer’s compensation and the appointment of one independent director. One shareholder has even demanded the replacement of the current chairman.

There are multiple facets to this dispute. First, this shareholder activism is emerging from the company’s original promoters as well as a couple of past Infosys executive directors. The former remain part-owners with substantial shareholding, though as a category they are dwarfed by larger shareholder groups, such as foreign portfolio investors (FPIs). The extent of shares held by former executives is not known. While it might be apposite to question whether their legal position should be viewed as ordinary shareholders or promoter-shareholders (because the media seems to have bundled all of them as promoter-shareholders), one thing is clear: They seem to enjoy support from only a section of the promoter-shareholders.

Second, asking the Infosys board and the management for better communication, however justified, begs a counter-demand: The protesting shareholders need to segregate their respective positions and all the promoter-shareholders should unequivocally communicate whether they are in this collectively or whether only a section of former promoters is siding with the ex-officials. For instance, we have not heard a peep from either Nandan Nilekani or S.D. Shibulal or Kris Gopalakrishnan. This is important to ascertain whether every original promoter is on board with the objections or not.

Third, with so much emphasis on communication, it seems Sikka was not properly briefed about “company culture” when he was hired and welcomed by former chairman N.R. Narayana Murthy. He should have been briefed about what he can change and what he can’t (chartering private jets, for instance).

Fourth, it would seem from all the statements that some shareholders seek to occupy a separate moral perch compared with all other shareholders or shareholder groups. Media chatter seems to be also throwing up mixed signals: Implicit in the carping shareholders’ narrative seems to be an articulation of a superior position in the shareholder hierarchy, based on their legacy executive positions in the company. Murthy’s messages also indicate a desire for cryopreservation of the corporate culture prevalent in the Infosys of the 1990s, regardless of where the company may want to move under a new management.

Does it indicate that some former promoters and former executives want differential rights within the same category of shares? If yes, this is a fresh twist for corporate democracy and perhaps the only instance (with the exception of some past promoter-owned or state-owned enterprises) where a set of shareholders has sought to exercise greater moral suasive powers despite a lower numerical presence.

This is not to outrightly dismiss their claims or demands for improved corporate governance in the company. As ordinary shareholders, they have every right to seek an improved, and constantly improving, corporate governance framework which ably discharges its fiduciary responsibilities and is based on proper disclosure norms. And if the board did indeed indulge in suboptimal disclosure while finalizing severance packages, then it is certainly distressing and requires immediate remedial measures.

But, beyond that, what’s emerging is that some former executives (including some select promoters) are loath to give up their involvement in the company, somewhat evocative of the recent Tata group upheaval. What also stands out is that other shareholder groups, such as FPIs, do not seem to care about the immediate concerns. One FPI has clearly communicated that the existing management should not be distracted but be given a free hand in running the company, improving margins and enhancing shareholder value.

At this point, a sidebar becomes necessary. Two of the vocal critics were chief financial officers in Infosys at different points in time and they are raising questions about severance paid to a CFO who succeeded them, somebody who must have been a junior officer during their respective tenures. This may not have any material bearing on their protestations but it’s a point that needs to be kept in mind.

Finally, an all-important question: Did the original promoters and former senior executives adequately future-proof the company, in terms of products, processes and delivery platforms?

The above article originally appeared in Mint newspaper on February 20, 2017, and can also be read here. 

The Budget Sidesteps Geostrategic Risks

Arun Jaitley’s budget seems to contain very little—by way of either allocations or strategic intent—to mitigate risks that endanger the Indian economy

Both the budget document and the Economic Survey have painstakingly detailed risks that endanger the Indian economy and can disrupt growth and employment impulses. Yet, the budget seems to contain very little—by way of either allocations or strategic intent—to mitigate these risks. The focus seems to be on surmounting immediate electoral challenges and neutralizing near-term policy distortions like demonetization.

Both Union finance minister Arun Jaitley and his chief economic adviser Arvind Subramanian see major risks emanating from the external sector. Jaitley’s budget lists multiple Fed rate hikes likely in 2017, commodity price uncertainty (especially crude prices) and “…signs of increasing retreat from globalization of goods, services and people, as pressures for protectionism are building up”. The Economic Survey also underlines the last two risks.

Given these clear and visible risks, it would be fair to expect defensive action, especially in areas of India’s strengths. The budget small print belies that belief.

Start with this year’s Economic Survey, which identifies clothes and shoes as ideal candidates for low-skill, high-employment manufacturing potential and for occupying crucial trade space being vacated by China. The survey also finds India has competitive advantage in these two items despite myriad challenges—such as domestic labour laws and tax structure, or the duty preferences enjoyed by competing countries in key buyer markets.

Given the Survey’s clear strategic direction, check out allocations for the commerce and industry ministry under the expenditure budget. Jaitley and his team have allocated only Rs0.01 crore to the Footwear Design and Development Institute, compared with Rs109.99 crore in 2015-16 and Rs25 crore in 2016-17. The institute provides skilled human resources and technology development to the leather and footwear industry. The Indian leather development programme (ILDP) gets a higher allotment of Rs500 crore, compared with Rs235 crore in 2015-16 and Rs400 crore in 2016-17. But then the ILDP focuses on improving the raw material base for leather units and the Survey actually shows non-leather footwear has achieved higher exports than leather footwear.

This is not the only mismatched allocation in the commerce ministry. There’s a token entry of Rs0.50 crore against the project development fund, which the ministry created with the Exim Bank to promote Indian private sector investments in Cambodia, Laos, Myanmar and Vietnam (commonly referred as CLMV nations) as part of Prime Minister Narendra Modi’s “Act East” policy. The creation of the fund was announced by Jaitley in his second budget in February 2015. There are, of course, no follow-up remarks in subsequent budgets.

The budget documents are littered with such examples. The geo-economic strategy, drawing from Modi’s repurposed foreign policy, betrays an excessive strategic reliance on select developed countries which could be a risk. The readout from the White House after US President Donald Trump’s brief telephone conversation with Modi reiterates that the US “…considers India a true friend and partner in addressing challenges around the world.” While these “challenges” remain undefined, Trump’s recent trade policy announcements now renders this alliance vulnerable. While it might be too early to declare doomsday, India needs a hedging strategy which includes exploring alternative markets.

And, yet, the budget sidesteps this obvious alternative. Take the example of Chabahar port in Iran, to which India has attached great geostrategic significance. The port offers India a land bridge to Afghanistan and Central Asian markets that bypasses Pakistan, and can become an alternative route to north Europe via Russia. Unfortunately, India continues to drag its feet on Chabahar, even though India and Iran started discussing it in 1997 and signed the first agreement in 2003 as part of the Delhi Declaration. This was further consolidated through a Trilateral Transit and Transport Corridor agreement signed during Modi’s visit to Iran in 2016.

Chabahar port has been allotted only Rs150 crore under the ministry of external affairs, compared with Rs100 crore in 2016-17. One could argue that since the project is being executed by special purpose vehicle Indian Ports Global Pvt. Ltd, a joint venture between Jawaharlal Nehru Port Trust (JNPT) and Kandla Trust, it might make sense to identify capital allocation to these two ports. The two ports have been allotted Rs1,850.30 crore and Rs393.90 crore for 2017-18, against Rs562.38 crore and Rs130.18 crore, respectively, during 2016-17. But there’s a catch: Both amounts have been listed under the head “IEBR”, or internal and extra budgetary resources, which means the government will not contribute any money and the two ports will have to generate these amounts from profits, loans and equity. Importantly, both ports are also implementing significant expansion plans (the JNPT’s plans include two new container terminals, two dry ports in Wardha and Jalna, and a special economic zone, among other things) and it is moot how much funds they can spare for Chabahar.

Is India going deliberately slow on Chabahar, given the Trump administration’s recent statements and executive order against Iran? India’s on-now, off-now engagement with Iran may have pushed the country closer to China through a joint military cooperation agreement and possible One Belt, One Road connectivity. The budget lost an opportunity to make some critical course corrections.

The article originally appeared in Mint newspaper on February 8, 2017, and can also be read here

Optics All The Way: Budget 2017 has brought to fore the astute lawyer-politician in Arun Jaitley

India’s finance minister Arun Jaitley has lived up to his credentials as a lawyer-politician adroitly: he has presented a budget for 2017-18 that pleases everybody but satisfies very few.

The capital markets investor class, including the foreign portfolio investor (FPI), is certainly happy. The movement of the stock market index reflected joy at being left alone: at closing time, the 30-share benchmark sensitive index was up 485 points in a relief rally. Investors were pleased that a rumoured restructuring of long-term capital gains tax was avoided. FPIs, who bring liquidity to India’s shallow markets, were spared additional tax blushes under something called the “indirect transfer provision,” which required tax to be paid on transfer of shares overseas if the underlying assets are located in India.

In the end, budget 2017 seems to be more about being seen to be doing the right thing rather than doing it. Jaitley’s thrust can be summed up in his own words: “My overall approach…has been to spend more in rural areas, infrastructure and poverty alleviation and yet maintain the best standards of fiscal prudence. I have also kept in mind the need to continue with economic reforms, promote higher investments and accelerate growth.”

This requires walking a fine line and Jaitley has husbanded all the political smarts he could muster.

Delicately balanced

On one side, the impending state assembly elections (in Uttar Pradesh, Punjab, Goa, Manipur and Uttarakhand) which begin on Saturday (Feb. 04) was bound to cast a long shadow on his plans. On the other side, Jaitley had to present a political budget without breaching the election commission’s restrictions.

Jaitley also needed lots of political nous since the budget had to be drafted in the backdrop of some momentous changes: demonetisation (which has dealt a severe demand and supply shock to the economy), the planned move to goods and services tax (GST), political developments in leading developed countries which could lead to severe economic consequences for India and other emerging economies. In addition, the fiscal responsibility and budget management committee’s report tied his hands by advocating fiscal prudence, barring exceptional situations.

On sum, though, there are a lot of announcements and political grand-standing but little by way of on-the-ground impact. For example, total expenditure planned for 2017-18 is up only 6.57% over the Rs 20,14,407 crore actually spent during 2016-17. That barely covers the rate of inflation. What’s even more disappointing, capital expenditure is budgeted to go up by only 10.7%. The country needs public expenditure to kickstart economic growth, especially in the absence of any private sector investment. Strangely, even though Jaitley has acknowledged this in his budget speech, he has failed to walk the talk.

Revenue could be a legitimate constraint. Tax revenues are expected to grow by only 12.7%, while non-tax revenues are actually budgeted to drop. Total revenue, including capital receipts, is expected to rise only 9.7%. One reason for the conservative estimates could be the expected shift to GST from July. The demand compression arising out of demonetisation could be another reason.

Political imperatives

Despite these limitations, the electoral imperative seems to have forced Jaitley to make numerous announcements for farmers, rural areas and allied sectors. In this, Jaitley has chosen to follow the footsteps of his predecessors by announcing grand schemes and allocating large sums. For example, he announced a Rs10 lakh crore agricultural credit target, against Rs9 lakh crore in 2016-17.

It’s curious that successive finance ministers chose to make this proud proclamation in the budget document when the money will actually be lent by various agri-lending agencies, such as the National Bank for Agriculture and Rural Development. There’s another strange twist: while the government promises to bear the interest subsidy on these concessional loans, the money kept aside for meeting the interest subsidy bill remains unchanged from last year. If the loan volume is likely to go up by Rs1 lakh crore, surely the subsidy element should also rise correspondingly?

Jaitley’s made another strange claim: he maintained that the pace of construction of rural roads under the Pradhan Mantri Gram Sadak Yojana had reached 133 km per day during 2016-17. This fact sits uneasily with roads minister Nitin Gadkari’s admission a couple of months ago that his ministry was unable to meet the highway construction target of 40km every day.

The political framework also probably stayed the finance minister’s hand from slashing corporate tax rates further, as had been promised in last year’s budget. In a year when demonetisation has affected millions of livelihoods and the ruling Bharatiya Janata Party wants to win Uttar Pradesh elections, the optics of helping large corporates could be a recipe for electoral hara-kiri.

He has instead cut tax rates for micro, small, and medium-scale enterprises with annual turnover up to Rs50 crore. His contention: their effective tax rate is higher than large companies and it is these units which actually create employment at the grass-roots level.

Arun Jaitley’s budget for 2017-18 pushes the political messaging of demonetisation further. He has painted a multi-hued picture that appeals to the stock market investor, because a rising stock index is often mistaken for economic health. His brushstrokes also strive to attract voters in various states by not only promising employment and income opportunities but also by painting the government as pro-disenfranchised and anti-privileged.

The above article was published in www.qz.com on February 2, 2017, and can also be read here