Infosys has disclosed in its ADR offer document that ``the company expects to recognise a deferred stock compensation expense in the approximate amount of $13.7 million for the fourth quarter of fiscal 1999 and $ 16.1 million for fiscal 1999. The size of this charge may cause the company to report negative operating income and negative net income for the fourth-quarter of fiscal 1999 for purposes of US GAAP.''

Under the US GAAP, the difference between theexercise price and the market price on the date of grant is required to be treated as a non-cash compensation expense and amortised over the applicable vesting period of the equity shares underlying the stock purchase rights. In fiscal 1998, Infosys had recognised $2.6 million in compensation expense in connection with stock purchase rights granted under the ESOP, including a compensation expense of $1.6 million recognised in the third quarter of fiscal 1998.

Under ESOP, employees are granted rights to purchase shares at a substantial discount to the current market value. Till December 31, 1998, 208,800 stock purchase rights remained to be granted. If the company's share price is on a rising curve, it would mean a significantly higher compensation expense on account of stock purchase rights under ESOP. This is likely to adversely affect the company's reported operating results under the US GAAP.

The timing of the recognition of deferred stock compensation expense in its books depends on dividends declaredby the company. ``Historically, when the company has declared a stock dividend, the dividend shares distributed to ESOP participants have not been subject to vesting.'' Thus, a part of the compensation expense is recognised under US GAAP. In the third-quarter of fiscal 1998, when the company declared a dividend it recognised a substantial compensation expense for the quarter. This is expected to occur again in the fourth quarter of fiscal 1999, following a scheduled dividend declared on December 20, 1998.

In effect, the company expects to recognise a deferred stock compensation expense of approximately $13.7 million for the fourth quarter of fiscal 1999 and $16.1 million for fiscal 1999. ``The size of this charge may cause the company to report negative operating income and negative net income for the fourth quarter of fiscal 1999 for purposes of US GAAP,'' says the offer document. Infosys introduced ESOP in 1994, which was among the first stock option plans in the country. An employee welfare trust wascreated and warrants to purchase 750,000 equity shares (2,000,000 shares after giving effect to the company's 1997 and 1998 stock dividends) were issued to the trust. The Trust, in turn, grants to company's employees stock purchase rights. Each stock purchase right entitles the holder to purchase one equity share at a price of Rs 100, which is substantially below the current market price of around Rs 2,500. The price of the stock purchase rights cannot be increased. The stock purchase rights and the underlying shares are subject to five-year vesting.