The finance journey


The finance journey started with the incorporation of Infosys on July 2, 1981. The paid in capital was 10,000, reportedly borrowed by Narayana Murthy from his wife. At inception, the Founders put in the basic financial principles – the company will earn a profit from year one, all projects will be delivered at a reasonable profit, the balance sheet will be liquid, borrowings will be only for asset creation, corporate resources will never be used for personal purposes and dividends will be paid out of surpluses. Indeed the initial years were tough, as India was a closed economy. Revenues grew from 0.12 crore in the first year to 8.66 crore in fiscal 1992, the year of economic reforms in India. The Founders were very clear that 10 years from founding they would go for an IPO and create liquidity for themselves. Employees were given stock in the company. In fact, by March 31, 1992 they owned 13.6% of the shares.

The IPO was indeed a seminal event for the company. During the road show, the Founders made a projection that the company would be a US$ 100 million revenue company by 2000, with a 20% net income, when revenues were US$ 5.01 million with net income of US$ 1.23 million as of March 31, 1993. The IPO was for creating a campus for 1,000 people, along with state of the art computing systems costing in all 16.58 crore, more than the revenue of the previous year of 8.66 crore. Great courage indeed! The IPO in February 1993 was a tough act. The market did not understand a software company as it was unheard of and completely new. The market was also rough at that time. The issue barely squeezed through, with help from its investment bankers. The issue opened at 145 on listing. Soon thereafter, our journey commenced as a public company.

Right from the beginning of being a public company, we decided that transparency was a competitive advantage and shareholders, as true owners, deserved the fullest, most timely information. September 1, 1993, our first AGM after listing, was a seminal event and well attended; lunch was offered too. In October 1993, India saw its first investor meet after listing at Mumbai with a large attendance, where management presented the investors with its strategy for growth, thus setting a new trend.

We invested part of the IPO proceeds in the primary and secondary markets to enhance returns. The markets went bad and we wrote off most of the investments. It was a humbling experience to stand in front of the investors and admit that we had made a mistake and assuring them that it would not be repeated.

Very soon the company put in place the 1994 Employees Stock Option Scheme, which along with the 1998 ADR scheme and the 1999 scheme gave stocks to over 18,000 employees, creating hundreds of dollar millionaires and thousands of rupee millionaires. Drivers, office assistants, secretaries got stock along with others and became millionaires. It soon became the most successful scheme in India and set a benchmark for other companies. It gave us an unique positioning, democratized wealth and suddenly the professionals realized that they too could become wealthy by ethical means early in their careers. It revolutionized India. The 1994 ESOP scheme was sought to be taxed in the hands of the employees and after a protracted legal battle, the Supreme Court held in 2008 that the scheme did not create a taxable event, allowing all grantees the benefit of no tax, helped of course by the abolition of capital gains tax on sale provided the shares are held for more than 12 months.

The company made a private placement of shares at 450 in July 1994 to raise 25 crore for its expansion. Soon after, in October 1994, the company declared a bonus issue of 1:1, the first of many bonus issues. 100 shares issued in the IPO at 9,500 has today become 12,800 shares valued at 4.15 crore (as of March 31, 2011) an annual compounded growth of 59%, a total gain of 4,64,422%, including total dividends received to date of 26.4 lakh.

The 1994 annual report was a very different report in terms of financial reporting and disclosure and soon became a collector's item. It started a trend with the 1995 report and subsequent reports disclosing a management commentary on the accounts, brand accounting, human resources accounting, EVA statement, and financial accounts in the GAAP of eight countries, some of them in the local language. The company won the first of its continuous 11 awards for the Best Presented Accounts from the Institute of Chartered Accountants of India (ICAI). The ICAI had to finally give us the Hall of Fame award that made us ineligible to apply for future years! The first financial statements under U.S. GAAP done voluntarily were issued.

We are proud to have been part of this dream journey. Using exemplary corporate governance guidelines, we have built a financially sound company.

We also issued the first publicly articulated financial policy in India which inter alia said that the company aimed to earn a minimum return on capital employed of two times the cost of capital, on invested capital of three times cost of capital; pay dividend of up to 20% of post-tax profits only out of cash surpluses (now increased to 30% of consolidated profit), maintain liquid assets on the balance sheet to meet a year's working expenses, borrow only for short-term mismatches in cash flows, depreciate assets in the shortest possible time; earn a minimum of 25% profit on sales revenue. In fact if a search were to be made of any corporation in the world over the last 15 years which has earned a minimum of 25% return on equity and 25% profit on sales, very few companies would show up and Infosys would be one of them. We started giving guidance in fiscal 1995 and this became a trend. Many have questioned us since then on the need to give guidance, and our view has been that we need to have symmetry of information between the business and the outside world and this was the best way to do it.

We then started preparing for our listing on the NASDAQ. In 1995, we had expressed our intention to list on the NASDAQ before the end of the decade. We started getting ready with the U.S. GAAP financial statements, benchmarked our corporate governance standards and investor relations standards. We started announcing our results quarterly from June 30, 1997, much before it became mandatory. We revamped our Board having majority of independent directors, instituted the Board committee systems, put in place a whistle blower policy, and policies to prevent insider trading, all of which became benchmarks once again. Infosys became the most followed company for its governance practices. We started work for the listing in 1997, postponed it as markets fell, started again in 1998 and completed in 1999.

The IPO road show was a great event, we met nine investors a day, with two teams across the globe to raise US$ 70 million. Two days before listing there was no book and we were nervous and almost called off the issue but soon the orders came in a torrent. It gathered a book of over US$ 3.5 billion, the first listing in the U.S. by an Indian company. The book runners suggested a price of US$ 37, we insisted on US$ 34 leaving them perplexed, insisting that we had to be fair to our investors. The stock on listing opened at US$ 51. We came back to India and were welcomed as heroes, and history was created. We reached revenues of US$ 203.4 million by fiscal 2000 with a net income of US$ 61.3 million, keeping the commitment made to investors when our Founders did the first road show!

A year later, we saw the biggest technology rally on the NASDAQ with our stock going up to US$ 675 at the height of the internet boom. Over two weeks, the company saw its valuation go up during the boom by US$ 20 billion only to see it come down by US$ 15 billion in one week! The markets crashed soon after in 2003 and the recession started. During April 2003 at the time of our annual guidance, Narayan Murthy made the famous statement about "fog on the windscreen" and we gave guidance in tune with our business forecast. The stock crashed 40% in two days and shook up the market. We recovered in our business and soon reached the US$ 1 billion mark in fiscal 2004. We had a great celebration! Liquidity on the NASDAQ was lacking. We worked with regulators in India to create the policies for a Secondary sponsored listing of an ADR. We had an issue of US$ 300 million, once again a first. We followed this up with a US$ 1 billion secondary ADR in 2005 and then a US$ 1.5 billion secondary ADR in fiscal 2007 that enabled us to get into the NASDAQ-100 index, again a first for any Indian company. We were the first foreign filers to file financial statements in IFRS with the Securities and Exchange Commission, U.S.

We are proud to be part of this dream journey – to set the benchmark in financial reporting; to use transparency and disclosures as our competitive advantage; to lead good practices in the country which got mandated later for all companies to follow; to set and follow the best corporate governance norms in the world; and above all build a financially strong company in all aspects. We have built a flexible financial model that has withstood many testing times. We were always willing to stand-up and share any bad news with stakeholders just as we shared good news. Our ability to look at long-term challenges and invest ahead of need without being unduly influenced by short-term consequences, had kept us in good stead. Today we have a strong balance sheet with US$ 3.8 billion in cash and cash equivalents, listed on the NASDAQ and in India with over 4,50,000 investors. The journey that started with 10,000, has evolved into a balance sheet of 26,000 crore with over 11,623 crore paid out as dividend.

The journey continues...