Companies & Sectors
Infosys Spat: Need To Rethink Directors’ Role Afresh
When two of corporate India’s best known names—Tatas and Infosys—are rocked by allegations of dubious governance practices, it is time to rethink our absurd expectations from the board of directors. While regulations have saddled ‘independent directors’ with more onerous burdens at every revision, they are forever in conflict with their own self-interest, which may be a fat remuneration from elite companies or manifold benefits that accrue from being networked into the elite and powerful business community.
 
Moneylife has written extensively on governance issues thrown up in the Tata imbroglio, where SEBI (Securities & Exchange Board of India) chose to remain a mute spectator to the issue of independent directors being sacked for being independent and failing to side with the ‘promoters’. This has provoked industrialist Nusli Wadia to file a suit in the Bombay High Court, raising some very pertinent governance issues. In the Infosys case, SEBI has announced that it will look into allegations made by an anonymous whistleblower about acquisition of an Israeli company, Panaya, and the high exit packages to chief financial officer (CFO) Rajiv Bansal and compliance officer David Kennedy. 
 
Vishal Sikka, CEO of Infosys, has reached out to employees on 20th February, telling them that there were “no wrongdoings” and that he was being targeted to the “point of harassment”.  But that does not answer any of the issues raised. 
 
NR Narayana Murthy, the highly regarded chief founder of Infosys, who headed SEBI’s second corporate governance committee, has publicly criticised the hefty severance pay package, comparing it to ‘hush money’. More importantly, despite a media conference and interviews by R Seshasayee, non-executive chairman of Infosys, as well as independent directors Rupa Kudva (former head of rating agency CRISIL) and Kiran Mazumdar Shaw (founder and chairman of Biocon India), we are none the wiser about the core issues. In fact, Mr Murthy himself has called a truce, but is unequivocal about the fact that his concerns remain on the table and have not been addressed. Let me list them, for easy recall.
 
1. Why did CFO Rajiv Bansal leave abruptly in October 2015 and why did the board throw past practices to the wind and commit to pay him a stupendous Rs17.38 crore as severance pay, as against his annual remuneration of under Rs5 crore? Did the human resources department (HRD) at Infosys raise concerns about the implications of such a high exit package across the group? Who proposed the precise sum of Rs17.38 crore? On what basis was it justified? Were any concerns voiced internally and, if so, were they addressed? Here we are in February 2017 with no answers as yet, except that there have been “lessons learnt”-this from a company which has 200,000 employees. 
 
2. Then, in December 2016, Infosys handed out another fat severance package to David Kennedy, its compliance officer, who was with the company for just over two years and had, apparently, quit voluntarily. Mr Kennedy was paid $868,250 (a hefty Rs6 crore), plus reimbursements for continuation coverage over a period of 12 months; and, yet, he was not asked to serve any notice period. Proxy advisory firms have flagged this issue and it is clear that there is more to these generous exit packages than meets the eye.
 
3. Even more surprising is the information that Mr Bansal was eventually paid Rs5.2 crore out of the committed Rs17.38 crore. Has he accepted less than one-third the severance package that was committed to him? People have sued for breach of contract for much lower sums. So far, Mr Bansal hasn’t spoken a word in public; but does that mean the matter is closed and he has given up the money? Or is the Infosys board being economical with details? Since SEBI says it is looking into the whistleblower’s allegations, can it officially ask Mr Bansal for information? 
 
4. The acquisition of an Israeli software firm, called Panaya, is at the centre of the controversy leading to Mr Bansal’s exit. The Infosys board has not denied allegations that Mr Bansal refused to sign-off on the deal and had walked out of a board meeting in October 2015. The explanation that Infosys paid $200 million for a controlling stake in Panaya, as opposed to a $162 million valuation just a month earlier, also does not hold water, if it is indeed true, as alleged, that Panaya was on the verge of shutting down. While Infosys and SEBI are both reportedly looking into the whistleblower’s allegations, a serious internal investigation must have a plausible outcome and not an endorsement of the management viewpoint through consultants or law firms commissioned by the board.
 
5. Infosys has appointed Cyril Amarchand Mangaldas to revamp its corporate governance framework with reference to board members, nominee directors and independent directors. Does this mean that the governance structure that existed during Mr Murthy’s tenure has been disbanded under Mr Sikka and needs to be reworked? This is hard to believe, especially since Mr Murthy and other founders continue to be classified as promoters. 
 
6. Interestingly, while the Infosys whistleblower appears to be targeting Vishal Sikka in his email, shareholders and founders assert that they have no problem with him. Mr Sikka has been good for the company and its shareholders. Mr Murthy is quoted by moneycontrol.com as saying, “We’re quite happy with CEO Vishal Sikka. He is doing a good job.” This is rather curious. Mr Murthy and some large shareholders have asked for a change in the board’s composition, especially the non-executive chairman and the head of the remuneration committee. Companies are led by CEOs or managing directors. It is hard to believe that the board, or Mr Seshasayee, the chairman, had done anything worse than rubber-stamp the CEO/management’s decisions. They could not have decided Mr Bansal’s severance pay or the acquisition price of Panaya on their own. It is rather disingenuous to claim that the board is responsible for poor governance standards but the CEO is not. 
 
7. Then there is Oppenheimer Developing Market Funds, one of the largest shareholders of Infosys, which came out strongly in support of Mr Sikka. While it is nice of Oppenheimer to express support for the CEO’s stabilising role, the intemperate choice of words makes one wonder about its motivation. Here is what The Economic Times attributes to its portfolio manager Justin Leverenz. He says, “There have been loud, cancerous rumours of intervention by non-executive founders in the management team.” He goes on to say, “We also believe that non-executive founders need to come to grips with the reality that this is a public company. It is no longer their firm…” and further that “the Board needs to clarify the appropriate role of non-executive founders of the Company.” Clearly, 
 
Mr Leverenz thinks he is talking down to the natives. Here are some facts. The non-executive founders did not leave behind a private firm that Mr Sikka took public. It is they who created an IT giant with 200,000 employees, with a market-capitalisation of Rs2,00,000 crore and revenue of $8.7 billion, with globally recognised and admired standards of good governance. As for a clarification of their role, surely Oppenheimer as a large investor would know that the non-executive founders continue to be classified as promoters. This means that, unlike Oppenheimer, which is only a large institutional shareholder, they continue to carry some responsibilities for actions of the company, without any say in decision-making. While support for a CEO delivering a good performance is fine, surely Oppenheimer should want answers to concerns raised by Mr Murthy which are not yet resolved. 
 
Retail shareholders, corporates and institutional investors would be watching how SEBI handles this serious issue of governance, especially since the regulator will get a new chairman on 1st March and there is an opportunity for a new direction.

User

COMMENTS

Suketu Shah

9 months ago

Its been a hugh fall in the thinking of NM last 4-5 yrs or so which is unfortunate and sad.Majority of the people esp stock holders held him in the past in such high esteem.Time to get out of Infosys stock(although inspite of everything its the most promising by far among all IT stocks) once you get a good price next few months.Also best to stay out of all IT stocks.

Kumar Swamy

9 months ago

Please don't compare Tatas with Infosys founders. You know better. We subscribe for a reason - unbiased coverage - unlike "presstitutes". Enlighten us, not irritate us.

REPLY

Sucheta Dalal

In Reply to Kumar Swamy 9 months ago

Mr Swamy, you are free to agree or disagree with my opinion, but you cannot demand that my thoughts and views should match yours. If you find it irritating, do move on. Your repeated and virulent comments makes me wonder . You may have a personal grouse or strong opinion about Infosys, but you are now beginning to heckle me personally. I wonder why.

Kumar Swamy

In Reply to Sucheta Dalal 9 months ago

I have nothing to do with Infosys, IT industry in general. Your hyper-sensitivity and ranting is very disturbing. Shame.

Chandragupta Acharya

9 months ago

The Infosys Founders remain large stakeholders in Infosys and by virtue of that expect the Board to protect shareholder interests. This is a legitimate expectation. The Board members however appear to be basking in their sinecures, content at rubber stamping CEO decisions. This is typical of most Indian Boards, but not enough to satisfy the high standards that Mr. Murthy & the Founders expect. Though numbers suggest Mr. Sikka has done well, every decision of his need not pass muster without appropriate scrutiny, and large shareholders such as Mr. Murthy have a right to demand appropriate disclosures. The board seems to be failing at this.

Chandragupta Acharya

9 months ago

The Infosys Founders remain large stakeholders in Infosys and by virtue of that expect the Board to protect shareholder interests. This is a legitimate expectation. The Board members however appear to be basking in their sinecures, content at rubber stamping CEO decisions. This is typical of most Indian Boards, but not enough to satisfy the high standards that Mr. Murthy & the Founders expect. Though numbers suggest Mr. Sikka has done well, every decision of his need not pass muster without appropriate scrutiny, and large shareholders such as Mr. Murthy have a right to demand appropriate disclosures. The board seems to be failing at this.

REPLY

Kumar Swamy

In Reply to Chandragupta Acharya 9 months ago

Infosys' decline started when NRN asked Nilekani to step down in favor of other founders taking turns as CEOs. His hubris, "Infosys us so Good, anybody can run it..." He is interested in his own PR, to be in the media limelight all the time. Now the"professional" management's inattention (rather ignoring) has bugged him, hence the tantrums using the media. Just ignore him!

Veeresh Malik

9 months ago

Sounds more like the churn in a real-estate company coming home to roost.

Kumar Swamy

9 months ago

Infosys Founders and Sucheta Dalal have to come to terms with the FACT..."non-executive founders need to come to grips with the reality that this is a public company.... It is no longer their firm…”

REPLY

Gurudutt Mundkur

In Reply to Kumar Swamy 9 months ago

You are right Mr Kumar Swamy... people do not know when to retire and when they do, even at the right time, they do not know what is retirement. Every country gets the government it deserves.... so also every company gets the Directors it deserves.

More layoffs likely as India's manufacturing sales shrink
Despite the governments efforts to attract investment under its Make in India campaign, sales of manufactured goods fell 3.7 per cent during 2015-16 -- the first decline in seven years --s parking fears of layoffs and debt default in the months to come.
 
Spurred by a global slowdown and lack of demand, sales of manufactured goods were falling even before demonetisation, affecting sectors ranging from textiles to leather to steel.
 
As a result, in the six months to September 2016, engineering major Larsen & Toubro laid off some 14,000 employees. Companies such as Microsoft, IBM and Nokia were also reported to have cut back on their workforce in 2016-albeit on a smaller scale-blaming sluggish demand for downsizing.
 
In November 2014, just weeks after Prime Minister Narendra Modi launched his Make-in-India campaign, Nokia shut its factory in Chennai, rendering 6,600 full-time workers jobless.
 
Economists say the government must step in to support the manufacturing sector, which constitutes 15-16 per cent of the gross domestic product (GDP) and supports 12 per cent of the workforce.
 
Why sales are down: Investment falls, costs and import duties rise, demand contracts
 
A range of factors including falling investment, increased input costs and higher import duties have caused demand for manufactured goods to fall, a trend that was visible before demonetisation and has strengthened since.
 
While the services sector grew by 4.9 per cent in 2015-16, faster than the 3.7 per cent recorded in the previous financial year, manufacturing contracted for the first time in seven years, from a growth rate of 12.9 per cent in 2009-10 to -3.7 per cent in 2015-16, Reserve Bank of India (RBI) data shows.
 
Small-scale private companies, with yearly annual sales of less than Rs 100 crore, have been more seriously affected as their sales have contracted continuously for the last seven years. Having registered an 8.8 per cent decline in 2009-10, their sales fell by 19.2 per cent year-on-year in 2015-16.
 
"Our sector is making huge losses as the price of electricity and raw material has gone up," Shan Ali Syed, owner of a small-scale textile plant in the town of Bhiwandi, 32 km northeast of Mumbai, told IndiaSpend. "Hence, cost of final product also increases, and we are unable to compete with cheaper imported Chinese products."
 
"Higher export duty and decline in demand has led to reduction in sales even before demonetisation," Manoj Kishanchand Ahuja, a Mumbai-based small-scale gold jewellery manufacturer, said. "We were forced to reduce production. So, hiring of workers on contractual basis has also gone down." He added that most of his business takes place in cash, and post-demonetisation, the situation has worsened.
 
Investment has fallen because of a decline in demand, leading to lower sales and profits. "New orders recorded a decline sequentially (quarter-on-quarter) as well as on a year-on-year basis and dipped into negative territory," the RBI said in its latest report.
 
A cutdown in industrial output for the fourth straight month in December, along with a depressed investment outlook, could lead to more layoffs, industry captains have warned.
 
On top of that, net loans to the manufacturing sector, which account for 65 per cent of corporate loans, have declined by 77 per cent in the last six years, IndiaSpend reported in January 2017. Large-scale manufacturing units have been the worst hit, recording a fall of 69 per cent.
 
The fallout: Jobs and companies at risk
 
If sales do not improve, companies will act to cut costs, manufacturers and traders said.
 
"The most common way of cutting cost in India is to reduce the workforce," economist Ila Patnaik, who has served as the principal economic advisor to the government of India, told IndiaSpend. "If the global economy and the domestic market do not improve, we can expect more layoffs in this sector."
 
Companies forced to close down due to financial distress will also lay off workers. Closure of 186 industrial units led to net job losses of 12,176 in the manufacturing sector over the last four years, the labour ministry estimated in a December 2015 reply in the Lok Sabha.
 
Syed blamed the post-demonetisation cash crunch for falling sales as well as a shortage of workers due to mass exodus from cities. "Labourers have to be paid in cash as they don't have bank accounts. Since we were unable to pay them in cash, the workers have returned to their villages," he said.
 
In the first 34 days of demonetisation, micro- and small-scale industries have suffered job losses of 35 per cent and a 50 per cent dip in revenue, an All India Manufacturer's Organisation study showed as the Indian Express reported on January 7, 2017.
 
Global upheavals have also caused problems for manufacturers, G.K. Jain, a large-scale manufacturer and exporter of readymade garments, said. 
 
With sluggish growth and high unemployment hitting American and European economies, importers there want to pay lower prices to overseas manufacturers, squeezing exporters' profit margins, Jain said.
 
There has been a rise in borrowings by vulnerable companies in the steel sector, the RBI report said. However, steel secretary Aruna Sharma said: "There was heavy investment in public and private steel sector in the past, and the investment takes place in cycles." She added, "So, once the returns on that investment start coming, there will be big investments again."
 
The RBI also noted that Indian manufacturers have collectively run up debt of Rs 6.9 lakh crore. The decline in sales and its impact on profit margins has impacted manufacturing industries' ability to service their debt. In its study of the financial statements of 1,707 manufacturing companies over the last four years, the RBI revealed that the number of vulnerable companies whose debt-equity ratio is higher than 200 per cent has increased from 215 in 2012-13 to 284 in 2015-16-an increase of 32 per cent. A high debt-equity ratio means a company is aggressively using borrowed money to finance its growth, leading to higher risk for default.
 
The RBI's analysis also showed that the debt at risk of default among private manufacturing companies grew nearly four-fold, from Rs 58,800 crore to Rs. 2.1 lakh crore ($32 billion) in the four years to March 2016.
 
What can be done: Invest in infrastructure, remonetise and increase overall public spending
 
Economists agree that the government must take steps to undo the damage caused by demonetisation by investing more in infrastructure, remonetising the economy and increasing the allocation for public-spending programmes.
 
It could take two to three quarters for the effects of the demonetisation-induced short-term shock to wear off and for normalcy to return, Patnaik predicted.
 
For longer-term support to manufacturing and job creation, new investment and enterprise are a must, economist Ajit Ranade said. "If we need to add two million jobs every month, then we need to create 20,000 to 50,000 new enterprises every month," he said. "We need a big push in infrastructure."
 
Disclaimer: Information, facts or opinions expressed in this news article are presented as sourced from IANS and do not reflect views of Moneylife and hence Moneylife is not responsible or liable for the same. As a source and news provider, IANS is responsible for accuracy, completeness, suitability and validity of any information in this article.

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COMMENTS

R Balakrishnan

9 months ago

But our GDP is growing... See the govt statistics--

SAMUEL WARBAH

9 months ago

Very sad.

Ferro alloy producers seek protection from cheap Malaysian imports
Amid concerns over cheap imports of ferro alloys from Malaysia, Indian ferro alloy producers on Monday called for protective measures from the Steel Ministry.
 
"A significant amount of ferro alloys is imported in India from Malaysia as they were able to produce the same at a much lower cost. Power is the major input for producing ferro alloys and it constitutes about 30 percent of the total cost. Power tariff in India is on a higher side as compared to other ferro alloy producing nations.
 
"Safeguard measures could help to protect the industry," said the Indian Ferro Alloy Producers' Association Chairman D.B. Sundara Ramam.
 
Cross-subsidy in power tariff further puts the non-captive producers at a disadvantage and the difference in power tariff between India and Malaysia is $20 per MWh, he said.
 
Speaking on the safeguard measures sought by the industry, Ministry of Steel's Director Anupam Prakash said the association represents 80 per cent of the ferro alloy sector and it can seek for the duty after applying for the same with a note mentioning that imports are damaging the industry.
 
"There are procedures for imposing safeguards. If the association makes an application mentioning that imports are damaging the industry, the Directorate General of Safeguards investigates the case and come up with recommendations. And accordingly notifications are issued," Prakash said. 
 
Ramam said upcoming supplies of manganese alloys with lower power tariff from Malaysian and Indonesian is expected to bring down profitability.
 
"In 2016, 3,65,000 tonnes of extra capacity has come into the market and additional 1,80,000 tonnes is expected to come in 2017," he said.
 
According to association, India produces around 3.5 million tonnes of ferro alloys and the Rs 23,000 crore industry employs around one lakh people.
 
Out of this India consumes around 2.3 million tonnes of ferro alloys and the rest 1.3 million tonnes is exported which earns foreign exchange of around Rs 8,900 crore, he said.
 
Disclaimer: Information, facts or opinions expressed in this news article are presented as sourced from IANS and do not reflect views of Moneylife and hence Moneylife is not responsible or liable for the same. As a source and news provider, IANS is responsible for accuracy, completeness, suitability and validity of any information in this article.

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