Mohandas Pai pours cold water on bonus issue, raises old demand of Infosys share buyback

Written by fe Bureau | Bangalore | Updated: Oct 11 2014, 14:47pm hrs
Mohandas-PaiThe issue of share buyback is important for companies which have got surplus cash, says former Infosys board member TV Mohandas Pai,
Former Infosys board member TV Mohandas Pai on Friday said the demand for a share buyback remains relevant even though Infosys has announced a 1:1 bonus issue, along with a 1:1 stock dividend of American Depositary Shares (ADS).

The issue of share buyback is important for companies which have got surplus cash. Mature companies with a good amount of cash reserve cannot mix this with the 1:1 bonus issue. The issue still remains relevant, Pai, among shareholders who demanded a buyback in July, told FE.

As a fiduciary agent, the Board has the responsibility to actively take up the issue and decide what it will do with the cash reserves. Surplus cash on the balance sheet cannot become a perpetual insurance for a management earning average returns. This could also lead to lacklustre performance as the management will get comfortable with the presence of such reserves. This is a big corporate governance issue for shareholders in India.

Pai, along with the companys former finance head V Balakrishnan, had written a letter to the company in July seeking a buyback of its shares to the tune of Rs 11,200 crore, which is roughly 40% of the existing cash and cash equivalents. The company, at the end of second quarter of FY15, had cash reserves of Rs 33,616 crore. The logic behind the demand was that Infosys had not articulated its strategy for use of its cash effectively.

"Given this massive net cash position and robust net income generation, Infosys is perhaps the most overcapitalised company in the Indian corporate history, from our perspective," went the letter.

Asked about the buyback demand at Infosys' earnings press conference, CFO Rajiv Bansal said: Few shareholders who have written to us on the buyback have actually since withdrawn their request, but the board considers the capital deployment and allocation on an ongoing basis, and as and when they feel it is important to do something about it, they would do it.

Analysts, too, appear to be looking for some other alternatives on the cash reserve front. "The company still has $5.5 billion in cash and we would prefer a comprehensive capital allocation strategy from management," said Bhuvnesh Singh of Barclays Equity Research in a report.

Market analysts see the bonus issue, coming after a gap of eight years, as a signal to shareholders on the company's growth prospects and strong financial reserves.