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Infosys founder NR Narayana Murthy spoke to ET at length on the need for clarification from the country’s market regulator on the rights and liabilities of promoters of listed companies.
He was speaking on the sidelines of The ET India Leadership Council, an exclusive and high-powered CEO group.
Edited excerpts:What is your view on promoters being considered insidersIf I am not wrong, the Securities and Exchange Board of India (Sebi) rule is that the founder of a listed company is considered a promoter as long as his shareholding in the company does not go below 1% of the outstanding shares of the company.
Such a founder-promoter is considered an insider.
The promoter has to sign a non-disclosure agreement (NDA) like any other senior officer or any member of the board of a listed company.
He has the same privileged access to information (as a member of the board or anybody who has signed the NDA in the company), including financial information, and should have the same liability as a member of the board.
However, Sebi has not clarified whether this assumption of mine is correct or not and has also not provided the details of the rights and liabilities of promoters.
Some boards of companies registered in India but listed both in India and the US believe that a promoter cannot be an insider since they hold the view that the Securities and Exchange Commission (SEC) rules prevail over Sebi rules.
My preference is that if a company is registered in India, is listed both on an Indian exchange and a US exchange, and the majority shares (like 80%) are listed on an Indian exchange, then the rules of Sebi should take precedence over the US SEC rules.
It is desirable that Sebi clarifies this issue.
Among Indian startups, there is a debate on differential voting rights for founders.I am not in favour of this.
It will take shareholder democracy even farther away from the principles of a democracy.
I understand why some people may want this.
Selling a part of your stake in the company to raise cash for yourself and still wanting to retain control is like having your cake and eating it.
I am not sure this is a good idea if we want capitalism to grow in India.
The role of independent directors in listed companies has come under scrutiny in recent times.
What are your thoughtsShareholders own the company.
The board of directors represents the shareholders.
The shareholders appoint directors for a certain period to supervise the agent (management) on behalf of the shareholders.
The board operates at the pleasure of the shareholders.
Whether a shareholder has one share or a billion shares, the board has the same obligation to provide unvarnished, truthful answers with full transparency to the questions of that shareholder on any issue.
In fact, protecting the rights of minority shareholders is an important duty of every board.
The primary functions of board governance include reviewing, critiquing and revising the strategy presented by the management; ensuring that the management has clear KPIs (key performance indicators) and fair performancebased compensation after consulting some key, knowledgeable shareholders (as happens in the case of well-governed companies in the West) and after debating, discussing and obtaining the approval of shareholders.
It must ensure a robust succession plan for the CXOs and that company norms are followed in fixing compensation for the incoming senior employees as well as in fixing severance pay for departing senior employees.
The board has to make sure that all risks are identified and action taken to mitigate them and that there are systems of control and checks and balances to detect and prevent fraud and related party transactions.
A strong and independent board ensures that acquisitions, dividends, bonus or stock dividends, rights issues and capital and revenue budgets are approved using sound financial theory after informed and intelligent discussions, and that shareholder grievances are addressed to the satisfaction of shareholders.
It must provide timely information on financial, business, risk and other parameters of company performance in full to shareholders, while ensuring that there is no selective disclosure to any one set of shareholders (except to founder-promoters who have signed an NDA as discussed earlier).
It should ensure that there is a robust whistleblower policy to address the grievances of whistleblowers.
In case the whistleblower has any accusations against the board, then the board must totally recuse itself, appoint a committee of highly respected, knowledgeable and competent members of the public and publish the detailed report on the website.
Also, if we want to make capitalism popular in India then (corporate) leaders must strive to demonstrate their oneness with the lower-level employees of the company and with the average person in society.
Giving 30% to 50% compensation increase to CXO personnel who already earn millions of dollars while asking the security guards of a company to work an extra day a week without any additional compensation is not the way to make capitalism popular in a poor country like India.
How do you instill accountability among independent directorsThe problem today, in India, is the lack of good quality independent directors resulting in governance deficits even in well-known companies.
One way to solve this is to start an Institute of Custodians to assess the quality of candidates wanting to be independent directors and, if found satisfactory, to train them to become competent independent directors of listed companies.
They have to pass a written examination and an oral examination.
No listed company should be allowed to appoint a person as an independent director without a valid certificate from the institute.
In case such a certified board member is party to a governance deficit, the institute should have the power to claw back the certification.
There is a demand from some Indian internet entrepreneurs for policy frameworks to protect local companies.India accounts for a small fraction of revenue for most foreign companies.
At this early stage of our economic development, we should be flexible, not create any further barriers, and remove every impediment to foreign and domestic companies.
Else, foreign companies will simply shun India.
There is also demand for global firms to locate Indian user data within the country.India is a very small market for most foreign companies.
Therefore, they may find it economically unviable to subscribe to our data localisation rules.
It is a good idea for India to pick job creation and export revenue as the only two parameters to be fulfilled by foreign companies at this early stage of our economic development.
What is your prognosis for the Indian IT industryThe biggest challenge that the Indian IT industry has faced in the last 40 years and has still not solved is the inability to move from being “reactive problem solvers” to “proactive problem definers and solvers.”Our customers used to tell me that our youngsters were sincere in doing whatever the customer asked them to do rather than suggesting solutions to customers’ problems proactively.
That was the situation in 1980 and it is the same in 2018! This is a huge cultural issue in India.
Huge investment in training by companies and a lot of hard work by employees are needed to overcome these cultural challenges.
How will automation impact the Indian IT services industryI believe that automation will create big opportunities for IT services because automation is achieved only by developing software robots that automate business processes.
That is the strength of the Indian IT software industry.
The future of the BPO sector is not as bright as we would like it to be.
Automation is likely to take over the jobs in the BPO sector.
Some IT companies are saying they will forgo some of their margins in order to boost growth.My conviction is that reducing margins does not improve growth except perhaps in a highly commoditised market.
In any case, the mathematics of such a strategy will impact the earnings per share and the share price unless such a strategy results in significant growth.
The investors will not like it and will exit from such a company.
A smart CEO will use innovation to move away from commodityminded competitors through a differentiating concept like the one I articulated at Infosys called BVA (Business Value Addition) in 2007.
I do not know if it is still being practiced there.
The foundation for BVA comes from my conviction that healthy margins come from premium pricing and good cost control.
Premium pricing comes from differentiation.
Differentiation comes from innovation.
Innovation comes from good leadership.
Good cost control comes from a tough CFO.
I do not believe in reducing margin.
Once you say publicly that you are willing to give up margins for growth, it becomes a slippery slope.
Your sales team will start selling the same deals at lower margins.
The company becomes weak over time since it has less money to invest in better employee salaries and perquisites, RD, training, quality, productivity, technological and physical infrastructure, branding and to offer better return to investors.
Every responsible board member and every CEO has to resist this temptation.
TCS is lengthening its lead over Infosys.TCS has done extremely well.
Chandra (Tata Sons chairman N Chandrasekaran) laid a strong sustainable foundation and Rajesh (Gopinathan) has continued the good work.
Both are extraordinary leaders.
They deserve the congratulations and appreciation of every IT professional.
There is talk in the market that they will even overtake IBM in market cap.
My best wishes to them.
How do you rate the performance of Infosys CEO Salil ParekhMy meetings with him on social occasions tell me that he is a decent person.
I wish him the best.
