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| August 24, 2017 |
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Impact 
Dynasties aren’t new to India—neither in politics nor in the corporate world. Like dynasties in politics have treated public properties as if these were family jewels, promoters of many listed companies have run businesses like the family-owned ones.
No wonder, foreign capital has shied away from India for years.
Remarkably, things have changed post liberalisation. Since 1991, two-and-a-half decades after India adopted liberalised economic policies, political dynasties seem to have lost their hold on the system substantially. Similarly, the robustness of corporate governance improved drastically among listed companies. Put differently, shrewd promoters realised they wouldn’t see growth by being unfair to their shareholders, joint venture partners, and other investors.
During this transition phase, many new-age companies emerged in India. And some established themselves as dynamic, ethical, and extremely competent yet minority shareholder-friendly companies.
This change is also one of the reasons for India’s stock market boom. Foreign Institutional Investors (FIIs) welcomed this transformation with open arms and poured money in India. Lately, Domestic Institutional Investors (DIIs) have also joined the party.
Infosys was the poster boy of this movement. Mr N. R. Narayana Murthy, the founder member of Infosys, has earned a respectable place in the corporate world. The man known for his simple living and high thinking was never involved in controversies during his active career. On the contrary, he epitomised fairness, unfailing integrity, and dogged vision.
After all founder members of Infosys retired from their active careers, NRN (as called by the Infosys insiders) gracefully handed over the “empire” to an outsider. Unlike politicians, he kept his word of handing over the charge to a non-family person post his retirement. When Dr Vishal Sikka took over as the MD and CEO of Infosys, it was a moment of pride for the Indian corporate world—as this changed the long held perception about Indian companies being managed unprofessionally.
What you’ve read until now may appear as a monologue, but this background is necessary before we can discuss the story in the limelight nowadays.
The high-profile exit of Dr Sikka last week hasn’t only raised many eyebrows within the industry, but it has caused discomfort among investors as well. Are we going back to square one?
The once “respected” NRN is now being treated as a “party pooper” by the board members of Infosys, and many media companies are releasing stories that link Dr Sikka’s exit with reportedly “factually wrong” and completely unfounded claims of Mr Murthy about Dr Sikka. His following comments caused an avalanche of damage to the company. “All that I hear from at least three independent directors, including Mr Ravi Venkatesan (co-chairman), are complaints about Dr Sikka. They have told me umpteen times that Dr Sikka is not a CEO material but CTO material. This is the view of at least three members of the board, and not my view since I have not seen him operate from the vantage point of an Infosys board member.”
Such statements coming from the founder of Infosys—that too, without him owning up to the responsibilities of these —served no purpose. On the contrary, these created unnecessary doubts in the minds of investors.
Fueling the fire, he raised doubts about the governance at Infosys under Dr Sikka. “I have nothing against Dr Vishal Sikka. I enjoy spending time with him. I have never commented about his strategy or its execution.... My problem is with governance at Infosys. I believe that the fault lies with the current board. If the board had not embraced inaction and had ensured proper governance then they could have created checks and balances required in any well-run company. That, alas, does not exist today.”
If you track the series of events from April 2017, you won’t be surprised by this exit...
In April 2017, Infosys appointed Mr Ravi Venkatesan as the co-chair and appointed a three-member committee to “support and advise” Dr Sikka on strategic matters. This seems to have been the bone of contention. The inside account of Infosys executives (based on media reports) suggests that Dr Sikka wasn’t happy with the appointment of Mr Venkatesan.
Meanwhile, NRN raised questions about the board’s demeanour and acquisition of Panaya, an Israeli software company, at expensive valuations and in this respect, high severance packages to high-level employees.
Independent inquiry on the Panaya acquisition has already given the board and Dr Sikka a clean-chit. Yet, Mr Murthy and a few other shareholders believed these reports were dubious. Nonetheless, Infosys under Dr Sikka didn’t publish the investigation report on the Infosys website, leaving some questions unanswered. This has also raised a huge question mark on the authenticity of the independent investigation.
It seems inflated egos are deflating the rigour of corporate governance these days. And when this happens to a company known for years for its good governance, investors naturally lose faith.
The share of Infosys lost about more than 14% over the last week, erasing over Rs 21,000 of market capitalisation. In all, 421 mutual fund schemes hold shares of Infosys under their portfolios. They had collectively investments worth Rs 21,285 crore in Infosys as on July 31, 2017. The total institutional holding in the company is around 58%.
Victimsof high-profile corporate battle at Infosys...
|
Collective stake in Infosys |
Losses from Dr Sikka episode
(Rs Crore) |
| Foreign Institutional Investors (FIIs) |
37.53% |
12,727 |
| Insurance Companies |
11.01% |
3,730 |
| Mutual Funds |
8.95% |
3,000 |
| Total |
57.49% |
19,457 |
Data as on August 22, 2017
(Source: Economic Times)
Many brokerage houses have reduced their price targets on Infosys. And some of them have even changed their view on the company’s prospects as well.
Under Dr Sikka, Infosys showed considerable improvements in performance. After he took over, the company’s attrition rate fell.
D-street gives a ‘thumbs-down’ to dr sikka’s exit
Event |
View of brokerage houses |
| Buy |
Neutral |
Sell |
| Before Dr Sikka resigned |
35 |
11 |
5 |
| After Dr Sikka resigned |
20 |
18 |
12 |
Data as on August 21, 2017
(Source: Mint)
To pacify investors, the management of Infosys has proposed to buyback nearly 5% of company’s share capital by allocating Rs 13,000 crore for this activity. The buyback price of Rs 1,150 per share leaves a massive 30% upside from the existing market price. But this won’t help institutional investors much. The acceptance ratio under the “institutional category” is likely to be 5%-10%. In other words, it means, institutional investors holding 100 shares of Infosys might be able to successfully bid only about 5 to 10 shares in the buyback offer.
Therefore, if the company fails to make a comeback in the intermediate term, investments of institutional investors could be in quicksand. In such a scenario, should any significant investor lose patience and dump its holdings, the selling pressure on Infosys may mount, dragging the stock market performance of the company under.
Dr Sikka was perceived as a transformational leader. In his 3-year tenure, he envisioned a new growth strategy for the enterprise. Had he been able to put the finishing touches to his initiatives, he would have placed Infosys in an secure position.
The Infosys board has some eminent personalities such as Mr Jeffrey S Lehman, Ms Kiran Mazumdar Shaw, Ms Roopa Kudva and Mr John Etchemendy to name a few. Apparently, there’s no insider who can shoulder the responsibilities that Dr Sikka bore. There are reports that, Mr Nandan Nilekani, one of the co-founders of Infosys, may be roped in again.
In spite of this, Infosys is likely to face an uphill task.
A majority of the board members have blamed Mr Murthy for Dr Vishal Sikka’s exit. Mr Murthy and the board may contend each other’s views even in the future.
For the moment, Mr Murthy has said this—"I will reply to these allegations in the right manner and in the right forum and at the appropriate time."
In the recent past, investors have witnessed the Mistry v/s Tata Sons high profile exit. And now its Infosys.
Do founders find it tough to emotionally detach from the banyan tree they watered once? Or do they want “yes sir” men as their replacements?
Finding the right answers to these questions is critical for the management of Indian companies. Because this will decide the premium investors willingly pay for “good corporate governance” or the discount they demand.
Retail investors best stay away from any speculation. You would be better off if you stay invested in mutual fund schemes with a proven track record across market phases and time frames.
Dynastic politics might be over, but politics in the corporate world are in full swing.
As far as the Infosys story is concerned, it ain't over till the fat lady sings.
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Impact
Internet data packs can indeed be termed as ‘new oil’. It’s the lubrication that keeps the whole digital system inter-working. New entrants in the telecom services sector have made data prices even more competitive—from Rs 250 for 1 GB, the data plan has dropped to Rs 50.
Free data calls are expected to exert more pressure on telecom operators to lower voice call rates. And now, the voice call rates are set to drop around 25%-30% over the next one year.
Reacting over the ongoing price war in the industry, a senior executive of a telecom company said, “We are hoping that the sector stabilises and bill drop stops, else it will mean greater losses for us.”
Mega competition seems to have rocked the industry. The flipside of the story is most of the telecom operators are sitting on a huge pile of debts. And, you know, Indian banks, especially the public sector ones, are reeling under the pressure of Non-Performing Assets (NPAs). If this price war continues and the weaker players in the telecom services industry go belly up, the banking space will see the ripple effect as well.
While there’s no need for consumers to be worried at the moment about these “macro things”, one should be prepared for the inconsistent quality of services. Let’s not forget, unless the telecom operator is in a healthy state, it can’t invest in infrastructure and infrastructure maintenance—which affects the quality of services.
Right now, the telecom industry is in a long-drawn out pricing war. Please keep in mind, no one benefits from any war permanently—one day, even the beneficiaries will face consequences.
The motive of a few mighty players is to grab the market share and knock down competitors, dragging them down to bankruptcy.
Why care about this?
For now, the good news for customers is: “Enjoy the nose-dive rates”.
Just remember though, one day you may have no option left for porting out. You have no IDEA, but it’s possible that one day you may not see that PUG close to your heel on the street. Don’t get giddy on Air and Tell your friends. Let’s be clear, this is not a movement to be content with the dropping call rates.
Write to us if you feel this is not a blatant display of crony capitalism, which thrives on eliminating the competition (anyhow), control the life-line of your customers, and then dictate terms.
And if you disagree, don’t complain about dropped calls.
JIYO aaramse (live peacefully)!
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Impact
Public Sector Banks (PSBs) are in a catch-22 situation. They are feeling the heat of Non-Performing Assets (NPAs), which run in high double digits (for some of them). Their profitability has come under severe pressure. And, ironically, to show improvements on these accounts, they are forced to take greater risks.
PSBs have played a major role in the successful implementation of Pradhan Mantri Jan Dhan Yojana that aimed at financial inclusion as the social objective. However, bankers complain these accounts are currently unprofitable for them. According to Mr R.K Takkar, MD and CEO, UCO Bank said, “Once the average balance in Jan Dhan accounts is 5,000-10,000, they will become a viable business proposition. At present, the average balance is around 2,500.”
“The social objective of the Jan Dhan Yojana has been fulfilled, and a lot of government schemes are also getting routed through the accounts. But unless we can credit-link the accounts, they are just adding to the additional cost for banks. Banks are now pushing for credit linkage but are facing tough competition from entities like micro finance institutions”, an executive of another public sector bank told media on the condition of anonymity.
To read more about this story and Personal FN’s views over it, please click here.
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Impact
Mr Rajesh Mehta (name changed) works at a public-sector bank and his life’s dream is to own a house in the suburbs of Mumbai. He has been saving every rupee, sacrificing his numerous fancies to achieve this goal. His saving strategy is fixed deposits and other savings instruments offered by the bank.
One day he meets Manish, a childhood friend, who had purchased a new house. Rajesh was curious to know how he had built the enormous corpus within a few years.
Manish runs his family business in exports and follows the “buy low and sell high” investment strategy. Over time, his business had made enormous profits and his investments clocked high returns. Rajesh was really impressed with this strategy and asked Manish to help him achieve his life’s goal.
In the following months, Rajesh had invested all his liquid funds into the stock market. The rise and fall of prices in the market gave him an adrenaline rush, which became a hook. Unfortunately, Manish did not highlight the risks associated with stocks to Rajesh.
In time, Rajesh had invested his entire investible surplus into equity. By now, he invested the Rs 15 lakh inherited from his parents and Rs 10 lakh of his personal savings. His plan was to avail of a loan of Rs 30 lakh and expected his portfolio to grow at the rate of 20%. As Manish’s strategy had earned around 25% returns last year, he assumed this would happen this year as well.
In the meanwhile, as Rajesh’s portfolio started to appreciate in value, he invested the rest of his corpus into equity stocks. He felt Manish was a true friend helping him build his biggest dream – a suburban house for around Rs 80 lakh.
After much research, Rajesh zeroed in on one house his family loved, and it almost felt like a dream come true. As he prepared to collate all the necessary cash required to buy this house, the market crashed. His portfolio of Rs 25 lakh had depreciated by 50%.
To read more about this case study and Personal FN’s views over it, please click here.
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You might have been investing in existing mutual fund schemes, and the New Fund Offers (NFOs) floated by mutual funds. But now, you could be able to be a part-owner in the Asset Management Company (AMC). Reliance Nippon AMC is expected to offload 61.2% shares through an Initial Public Offer (IPO). It manages assets worth Rs 3.6 lakh crore, which includes the asset base of Rs 2.23 lakh crore under the mutual fund arm. Do your homework before you invest in the IPO.
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Corporate Governance: Corporate governance is the system of rules, practices and processes by which a company is directed and controlled. Corporate governance essentially involves balancing the interests of a company's many stakeholders, such as shareholders, management, customers, suppliers, financiers, government and the community. Since corporate governance also provides the framework for attaining a company's objectives, it encompasses practically every sphere of management, from action plans and internal controls to performance measurement and corporate disclosure.
(Source: Investopedia)
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Quote: "Go for a business that any idiot can run – because sooner or later, any idiot probably is going to run it. "- Peter Lynch
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