ESOPs Fables :Infosys Stock Buyback Bonanza


“Our society has become so unequal. The wealthy need to be taxed more” -Rohini Nilekani

In an information saturated age such as ours corporate spin is sine qua non of business reporting where the narrative is controlled by the few to the detriment of the many. None is more evident than in the dominant narrative leading to the resignation of Vishal Sikka- the CEO of Infosys and the thirteen thousand crore buyback share option of Infosys that soon followed.

The corporate spin of professing superior corporate values of governance by powerful promoter- shareholder clique is more often than not a cloak for concealing pecuniary motives of the few as the controversial circumstances surrounding the buyback share bonanza of Infosys reveal.

The spin was dressed up as a Manichean struggle between Forces of Light-namely Promoter shareholders like Narayana Murthy and the Forces of Darkness -of the likes of Sikka who were allegedly involved in shady acquisitions and charging hefty salaries/severance packages to the detriment of the company’s interest.

Beneath the hyperbole of Good Versus Evil lay a bitter struggle between the ESOP wealthy class of promoter-shareholders who were interested in the company buying back shares to enrich themselves and Sikka the CEO of the company who was more interested in conserving the cash resources of the company to fund technological innovation like artificial intelligence and automation.

The truth of the matter is that some years before the spat between the promoters of Infosys and Sikka erupted,the Indian Tech giants like TCS,HCL Technologies,Wipro ,Infosys and many others were already in a downward spiral as their business model of  tech service providers were taking a hit. As a business report suggested the global headwinds confronting tech companies like Infosys having markets like the USA,were protectionism in form of erecting entry barriers for tech workers from India, price pressures on margins, political uncertainties arising from political uncertainties like BREXIT and currency fluctuations. The winnowing machine of automation, robotics and artificial intelligence made most of the low skilled jobs redundant adding to the decline of growth prospects of IT companies.

For Infosys to survive it became imperative to transform its business model of providing low tech services to moving to the next gen company of highly skilled employees in artificial intelligence and robotics. But taking a tech company from low grade software to the next gen high tech company with tech expertise branching out to artificial intelligence and robotics requires huge amounts cash. Upon his appointment at Infosys Vishal Sikka emphasized,“We will focus heavily on growth, and for that we need the benefit of our cash reserves .My plan will not be to what happened with earlier generations of low-grade software, of just always cutting costs, which is just a downward spiral. This is about renewing ourselves into a next-generation service company.”

Radical transformation requires an environment of innovation and an enormous drive to resist the forces of inertia and aversion to risk. At this critical phase of radical transformation it did not require the distraction of the buyback of shares which would whittle down its strategic cash reserves to enrich primarily a handful  of rich founder –shareholders.

It was in this context that the battle lines between Vishal Sikka who came from impeccable product software background of working with SAP and the old guard of promoter-shareholder class were drawn.The allure of buyback of shares by the company was too irresistible as the low hanging fruit of cash reserves was just waiting to be plucked.The promoter shareholders of Infosys were straining at the leash and were clamouring for a buyback of their own after TCS in February 2017,HCL in May 2017 and Wipro in July 2017 announced buybacks that enriched their promoter shareholders.

Events moved in quick succession.  At first there was negative flak directed against Sikka namely, erosion of corporate governance, salary packages, high severance pay and costly acquisitions. On 18th August 2017 Sikka resigned as CEO of the company. On 19th August Infosys announced a buyback of 11.3 crore shares at Rs 1,150 each.The buyback stock coup was executed with military precision: unlike a military coup it was bloodless but like a military coup there were no prisoners taken. On 24th of August 2017 Board Chairman R Seshasayee resigned along with Co- Chairman Ravi Venkatesan and two Directors Jeffery Lehman and John Etcemandy also tendered their resignation.

What is often not reported in the mainstream press is that the big push for buyback of shares also comes with income tax concessions given to share buybacks under the Finance Act 2016. Under the recent changes in the Tax Law listed companies do not have to pay any income tax.Additionally if their shareholders have held the shares for a period of more than 12 months then also it is exempt from tax. In the case of shares sold short term (ie shares held for less than 12 months) there is income tax effectively at 17.77%. On the other hand dividend distribution attracts tax at 20.90% in the hands of the company and 11.85% if the dividend is in excess of Rs 10 lakhs in the hands of the shareholder. Thus the tax laws favour the buyback route compared to dividend distribution.

Thus the tax laws of the BJP government gave impetus to the value extraction game of share buyback to favour the rentier shareholder class to indulge in stock market rigging instead of plowing the resources for genuine expansion and job creation. The BJP slogan “Make in India” soon became “Rig in India”.

Morever the stock buybacks operates as a gigantic suction pump drawing the cash reserves and profits of the company to fund the powerfully entrenched shareholders to the detriment of labour compensation and salary.This enormous suction pump called the stock buybacks is the root cause of inequality .

The corporate strategy of allocating corporate profits for share buyback came in for critical study in the Harvard Business Review. In an article titled “Profits Without Prosperity” Professor William Lazonick points out that the stock market boom and rising profitability of corporations is not translating into widespread economic gain. As he points out “While the top 0.1% of income recipients—which include most of the highest-ranking corporate executives—reap almost all the income gains, good jobs keep disappearing, and new employment opportunities tend to be insecure and underpaid. Corporate profitability is not translating into widespread economic prosperity.” A huge part of the blame, the author points out, is on account of stock buyback of companies.

Stock buybacks in US is a big wave as 449 out of 500 companies listed in S&P 500 index have used 54% of the earnings to repurchase its own stocks while dividends absorbed 37% of the corporate earnings.Writing for Forbes ,Steve Denning points out the dangers of stock buybacks for the economy “First, it leads to neglect of long-term investment projects. Second, firms borrow too much to pay for their buy-back habit. Third, the artificially inflated share prices amount to a financial bubble and will eventually tumble. Harvard Business Review called the practice “in effect, stock price manipulation.”The harmful effect of stock buybacks was aptly described by the Economist as “sniffing corporate cocaine” which gives a short term high while sacrificing long-term  prospects of the company.

In the ultimate analysis the fascination of stock buybacks lies in its simplicity of quickly enriching stock holding corporate elites while preserving the illusion of prosperity. Others describe it as a parasitic value extraction game and not a value creation one.Joe Nocera points out in Bloomberg “companies are going to be spending it on stock buybacks and increased dividends. To put it another way, they are going to use the influx of cash to reward capital instead of labor”…. “ They’re a form of financial engineering intended to artificially boost a company’s share price.”

And finally who benefitted most from the 13000 crore Buyback bonanza? And who lost? The Nandan Nilekani  family group netted Rs 667 crores, the Murthy family got a whopping Rs 623.05 crores.Amongst the other top 10 beneficiaries were Sudha Gopalkrishnan- wife of Kris Gopalkrishnan-  who got Rs 172.5 crore .It is greatly ironic to note that Mr Narayan Murthy whose family grew their wealth by 623 crores piously advises employees of Infosys to be content with less salary .

The biggest loser was the company itself as the cash reserves were diverted for enriching the promoter –shareholder instead of transforming the company into a next gen IT power house. For the employees in the future there will be long periods of salary stagnation with the spectre of layoff. For them the reward for hard work would be more hard work. For the rebellious few there would be an Aadhar mandated surveillance state to keep them in line.

And what about Vishal Sikka?He was exonerated of any wrongdoing with respect to the acquisition of Panaya by independendent  enquiries.Post buyback there’s a strange silence on this matter from the promoter shareholders. Sikka remains gagged and bound head to toe by a non disparagement clause and consigned to oblivion by the mainstream press. His side of the story may not see the light of the day.

At the time of Vishal Sikka’s appointment Narayana Murthy joked “Vishal Sikka” means “Lots of Money,Big Money” .By a grim twist of savage irony, while the promoter shareholders reaped hundreds of crores of tax free moolah, Mr  Vishal Sikka whose name evokes “Lots of Gold Coins” was himself short changed in the end.

C R Sridhar is a lawyer.

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