INFOSYS :

APPROACH TO

CAPITAL MARKETS

2014

“In God we trust, everybody else bring data to the table.” - NRN

Contents

THE IPO ..................................................................................................... 2

Issues ......................................................................................................... 5

Bonus and Stock Splits ............................................................................... 6

ADR ............................................................................................................ 6

Nasdaq Listing : A Giant Leap .................................................................... 9

First Sponsored Secondary ADR: July 31,2003 ..................................... 10

Second Sponsored ADR offering: May 2005 .......................................... 10

Third Sponsored ADR offering: November 21, 2006 .............................. 11

DATA ........................................................................................................ 12

Timeline .................................................................................................... 13

Zero Debt Concept ................................................................................... 14

The Move : Nasdaq to NYSE .................................................................... 15

NASDAQ VS NYSE ............................................................................... 16

Infy Share Buyback : To Buy Or Not To Buy ............................................. 17

THE IPO Why did Infosys wait till 1993 for IPO?

In late 1989 the founders of Infosys met to review the

business model. There was a growing feeling of frustration

among them given how difficult it was to conduct business

in India, especially one that caters to global clients. Among

other things that impeded the growth of the company were

the stringent regulations that the Indian government placed

on foreign trade and the import of cutting edge technology.

In this meeting, all the founders, except for Narayana

Murthy had come to a conclusion that it was time to dissolve

the company. Murthy, on the other hand offered to buy out

all the partners in that room indicating his confidence in the

strengths and abilities of the company. He offered a

promise of taking the company public within five years if the

others stuck with him till then.

The partners agreed and five years later Infosys went

public.

Quick facts about the IPO:

Offer price – Rs.95

Price at opening of trade – Rs. 145

Merchant Banker – Enam Securities Pvt Ltd

Underwriter – Enam Securities Pvt Ltd

Total amount raised – Rs 131 million

Interestingly, Infosys shares were under subscribed upon

issue. It was bailed by Morgan Stanley at the time which

picking up 13% of the equity.

The majority of investors were foreigners.

Underwriters had to bail out

Infosys’ first IPO from under-

subscription.

Since its IPO, Infosys has

chosen to include information

that is relevant, but not

mandatory to stakeholders in

its annual report, going beyond

what is required by the law.

“We were mentally prepared to

be transparent, to be

accountable, to follow the finest

principles of corporate

governance. It was all part of

our mindset… our craving for

respect. We felt we had to

demonstrate to other

companies in India that if you

follow the finest principles of

corporate governance,

investors would want to invest

more and more in your

company,” - Narayana Murthy.

In fiscal ’94, Infosys provided a

comparison of the actual

performance, vis-à-vis the

projections made in the

prospectus. The next year, the

disclosure of such information

became mandatory in India.

The Upsides

The IPO gave Infosys access to capital to fund its growth

opportunities.

Increase in popularity of the company. The IPO brought to

the notice of many private investment houses as well as the

retail investors who were.

Generally an IPO also gives the founders an opportunity for

an exit strategy by allowing them to cash-out of the firm.

Clearly this was not the case for Infosys.

Furthermore, by enabling greater risk sharing, public equity markets can increase the availability of equity capital and facilitate financing of growth options (Shah and Thakor, 1988).

Downsides

Costs of added disclosures cut into the expenses of Infosys.

Market pressures that shift focus from long term goals to

short term ones.

Extreme scrutiny of actions of Infosys management. Share

prices remain high so long as managers exude confidence.

Resignations, terminations or leadership changes affect

share prices largely. As a result moves need to be very well

calculated else they have severe repercussions.

Private placement of 1994

In October 1994, Infosys followed its IPO with a private

placement of Rs. 250 million.

The primary participants of the private placement were

Foreign Institutional investors, Financial institutions and

body corporate. The private placement was primarily

directed towards the expansion in Bangalore.

Details of the placement are as follows:

No. of shares – 5,50,000

Price per share – Rs.450

Events that affected the stock

price movement

1994 – Development centre at

Fremont

1995 – European office at the

UK

1996 – Infosys foundation

established

1997 – CMMI Level 4

1998 – Starts solutions practice

1999 – Listing on NASDAQ

1999 – Infosys business

consulting is launched

2000 – Re-launches Banks

2000 as Finacle

2002- Nilekani takes over as

CEO

2004- 1 bn revenues

2006 – NRN Retires

2007 – Kris G becomes CEO

2011 – KV Kamath becomes

chairman

Declaration of dividends

Although the net profits have been relatively steady, the dividend as a percentage of

EPS has been highly volatile. It remains to be understood why Infosys has chosen to

fluctuate its dividends rather than stabilizing them.

0

500

1000

1500

2000

2500

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Infosys Dividend

Final dividend %

0

20

40

60

80

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Payout as a % of EPS

payout (% of EPS)

Issues

From Apr

To Mar

Authorized (in Rs. Cr)

Issued (in Rs. Cr)

No. of shares FV Capital Comments

2013 2014 300 285.7 571402566 5 285.7

2012 2013 300 287.1 574151559 5 287.1

2011 2012 300 287.1 574151559 5 287.1

2010 2011 300 287.1 574151559 5 287.1

2009 2010 300 286.9 573825192 5 286.9

2008 2009 300 286.4 572830043 5 286.4

2007 2008 300 286 571995758 5 286

2006 2007 300 285.6 571209862 5 285.6

2005 2006 150 137.8 275554980 5 137.8

2004 2005 150 135.3 270570549 5 135.3

2003 2004 50 33.3 66641056 5 33.3

2002 2003 50 33.1 66243078 5 33.1

2001 2002 50 33.1 66186130 5 33.1

2000 2001 50 33.1 66158117 5 33.1

1999 2000 50 33.1 66150700 5 33.1 ADR issue of 1800000

1998 1999 50 33.1 33069400 10 33.1

Bonus issue + new issue of 749000

1997 1998 30 16 16017200 10 16

734500 new shares, 14500 of forfeited shares issued, 8008600 bonus shares issues at 1:1,

1996 1997 10 7.3 7259600 10 7.3

1995 1996 10 7.3 7258600 10 7.3

1994 1995 10 7.3 7258600 10 7.3

Bonus issue in proportion 1:1, and additional issue of 550000 shares to FIIs , Mutual funds

1993 1994 4 3.4 3352100 10 3.4

To partly finance the setting up of a STP

1992 1993 4 2 1976100 10 2 IPO

Increase in Shares outstanding

Bonus and Stock Splits

Announcement Date

Bonus Ratio

Record Date

Ex-Bonus

Date

4/14/2006 1:01 7/14/2006 7/13/2006

4/13/2004 3:01 7/2/2004 7/1/2004

1/25/1999 1:01 3/5/1999 2/8/1999

6/18/1997 1:01 9/12/1997 8/19/1997

6/30/1994 1:01 9/15/1994 8/19/1994

ADR

Issuance of Depository Receipts in India started in early 1990s to facilitate foreign

listing. The Indian Government issued the Foreign Currency Convertible Bonds and

Ordinary Shares through Depository Receipt mechanism. The first ADR issued was in

1992by Reliance and Grasim Industries to access the foreign equity market.

The various reasons for a company to do foreign listing are:

The company expects to reduce its cost of raising capital by diversifying its

exposure to different market risks and by reducing illiquidity of trading in its

shares

The companies in developing nations like to take advantage of the depth of the

developed markets and raise capital through the foreign capital markets

The foreign listing of stocks sends a signal of high quality which improves firm

valuation

For foreign investors, ADRs are a convenient way to add global exposure to their

portfolios. They can gain the benefits of diversification while being in their own market

Announcement Date Old FV New FV

Record Date

Ex-Split Date

11/30/1999 10 5 2/11/2000 1/24/2000

and settlement and clearing houses. The small size foreign investors find it tedious to

comply with legal and constitutional requirements and restrictions. With ADRs, they can

invest in foreign portfolio at the comfort of their homes rather than in the Indian stock

market.

Foreign investors who enter Indian markets as direct investors tend to add volatility to

the asset prices through herding behaviour. Due to this reason, it is better for India to

allow domestic companies to issue ADRs in foreign countries.

The issuing company that wants to issue ADRs needs to have a good performance

record for the past three years. The shares that are bundled as ADRs were treated as

foreign direct investment in the issuing company and as a result should go beyond 51%

of the subscribed capital of the company.

Ideally there should not be any difference in value between the ADR and the underlying

stock. However, ADRs issued by Indian companies enjoyed a high premium above their

underlying stocks. In Indian companies, Information Technology (IT) companies had the

highest premia levels with an average of 28%. Infosys was the winner amongst these

with a premium level of more than 60% in 2002.

To take care of the big difference in value of domestic shares and their foreign listed

counterparts, the Reserve Bank of India (RBI) introduced two-way fungibility. It was

expected that the arbitrage opportunity that would be created due to this reform would

converge the ADR prices and the domestic prices of the shares. However, despite this

reform, the premium did not come down due to time period involved between a US

investor buying an ADR and cancelling it.

The domestic share price of Infosys enjoyed moderate increase of 12-15%from their US

listing.

Table 1: Effect on Average Domestic Stock Prices Before and After ADR Listing

Stock

Prior

Mean

Post

Mean

% Change in

prices

t-test for sample

means

Infosys 2976 3359 12.8 3.7

Table 2: Average Trading Volumes Before and After ADR Listing (100 trading days)

Stock Prior Post

Difference t-test

Statistic

Infosys 58,128 1,10,887 7.27

Nasdaq Listing : A Giant Leap With all the restrictions and regulations in mind, Infosys

Technologies became the first Indian company to be listed

on NASDAQ in March 1999. The company’s American

Depository Shares started trading in the U.S. NASDAQ

under the ticker symbol “INFY” on March 11, 2011.

The number of outstanding equity shares in the company,

as of March 31, 2000, were 66,150,700. As of March 31,

2000, there were approximately 13,500 record holders of

ADRs evidencing 4,163,800 ADSs (equivalent to 2,081,900

equity shares). As of march 31, 2000, there were 43,000

record holders of the 66,150,700 equity shares listed and

traded on the stock exchanges in India.

The underwriters, NationsBanc Montgomery Securities LLC,

BancBoston Roberston Stephens, BT Alex Brown and

Thomas Weisel Partners LLC, havethe option to purchase

an additional 2,70,000 ADRs representing 1,35,000 to cover

over-allotments. Infosys received net proceeds of US

$70.38 million.

Table 3: ADR issue by Infosys

Company Industry Issue

Stock

Exchange

ADR

Ratio

Infosys Software

Mar-

99 Nasdaq

2:1 (1:1

from

July’04)

\

“For us to advance our brand

equity outside India, we needed

to get listed on a global

exchange such as NASDAQ. …It

is a small step for NASDAQ, but

a giant leap for Infosys and the

Indian software industry.” –

Narayan Murthy

“We found that for high-tech

companies in our area,

certainly NASDAQ is the dream

exchange. All our comparables

are here. This is where we felt

we should rightly belong. It’s

purely about being in the right

place… That was the raison

d’être for us,” - Narayana

Murthy

The Infosys issue has been oversubscribed quite a number of times. The ADR has

given an exposure to American investors to Indian IT companies. With just 9 lakh

shares on offer, the floating stock will be low and hence, this should keep the price up.

First Sponsored Secondary ADR: July 31,2003

The Government of India allowed conversion of domestic shares into ADR through the

sponsored ADR program. Under this, the company’s board takes the consent of the

shareholders, files a registration statement with the US regulations and places the

domestic shares with the ADR investors through a book building mechanism. The price

of the ADR would be determined by the lead bankers to the issue. Under this proceed,

the company does not receive any money and the proceeds of the net expenses are

distributed amongst the Indian shareholders who participate in the program.

In 2003, Infosys successfully sponsored the Secondary ADRs offering. A total of 10,109

offers consisting of 1,48,63,802 equity shares were received in that offer period. Of the

received offers, 338 offers consisting of 24,630 equity shares were rejected for being

invalid offers and the balance of 9,771 valid offers accepted.

On July 31, 2003, 52,18,000 ADSs representing 26,09,000 equity shares were sold in

the sponsored ADR offering at a price of US $ 49.00. On August 1, 2003, the

Underwriters exercised the over allotment option and purchased a further 7,82,000

ADSs representing 3,91,000 equity shares at a price of US $49.00. The gross proceeds

from the sale of the 60,00,000 ADSs representing 30,00,000 equity shares, aggregated

to US $294 million.

Second Sponsored ADR offering: May 2005 In 2005, Infosys successfully sponsored a Secondary ADS offering. A total of 14,656

applications comprising of 5,23,88,377 equity shares were received in the offer period.

Of the received offers, five offers consisting of 18,561 equity shares were rejected for

being invalid offers and the balance of 14,651 valid offers were accepted.

On May 26, 2005, 1,40,00,000 ADS representing 1,40,00,000 equity shares (ADR ration

became 1:1 in July 2004) were sold in the Sponsored Secondary ADR Offering at a

price of US $ 67. On the same day, the underwriters exercised the over-allotment option

available to them and purchased a further 20,00,000 ADS at a price of US $67. The

gross proceeds from the sale of the 1,60,00,000 ADS, aggregating to over US $1.07

billion was distributed to the selling shareholders.

A part of the offer was reserved for Japanese investors.

The issue increased the size of US float of Infosys to 14% of its capital.

Third Sponsored ADR offering: November 21, 2006

In November 2006, 3477 valid applications comprising 8,40,32,322 equity shares were

received during the offer period. On November 21, 2006, 3,00,00,000 ADS with ADR

ratio of 1:1 were sold in secondary ADR offering at a price of US $53.50 for each ADS,

before underwriting commission and discounts and the other offer expenses. The gross

proceeds aggregated to over US $1.6 billion.

As part of this offering, 50,00,000 ADS were placed with Japanese investors through a

Public Offering Without Listing (POWL).

The issue increased US market cap of Infosys to $5.91 billion.

DATA Infosys ADR Issue in March 1999

Size of issue 1.8 m ADS or 0.9 m equity shares

Number of ADS per equity share

2

Offer price $27.28 per ADS/ $55.76 per share

Actual price $34 per ADS/ $68 per share

Premium on the Offer Price 22% or $6.12 per ADS

Issue Amount $61.2 m

Green shoe option $9.18 m = 15% of $61.2m

Total Amount raised $ 70.38 m

BSE closing price Rs 3201/-

First Sponsored Secondary ADR : July 31,2003

Size of issue 6 m ADS or 3 m equity shares

Number of ADS per equity share 2

Actual price $49 per share

Premium 26% over BSE closing price

BSE closing price Rs 3593.30

Second Sponsored ADR offering: May 2005

Size of issue 16 m ADS/ equity shares (6% of NSE/BSE listed shares

Number of ADS per equity share

1

Actual price $67 per ADS

Premium 34% over NSE price

Third Sponsored ADR offering: November 21, 2006

Size of issue 30 m ADS/ equity shares

Number of ADS per equity share 1

Actual price $53.50 per ADS

Premium 34% over NSE price

Timeline 1993

IPO

1 share=Rs.95.

Face value= Rs.10.

1994

Infy issued a bonus of a share for every share held.

Share price = Rs.650

2 shares= Rs.1300

1997

Infy issued a bonus of a share for every share held

Share price =Rs.1184

4 shares=Rs.4,376

1999

January: Infy issued a bonus of a share for every share held

8 shares =Rs.18,960

November: Stock split

Every share was split into 2. Share price= Rs.7,150

16 shares = Rs.1,14,400

2004

Infy issued a bonus of a share for every 3 share held

Share price = Rs. 1409

21 shares = Rs.29,589

2006

Infy issued a bonus of a share for every share held

Share price = Rs.1680

42 shares =Rs. 70,560

2013

One share purchased in 1993 was now 42 shares

Stock price on jan 24, 2013 was Rs.2797

Zero Debt Concept Mphasis, Cognizant, Info Edge ltd and Infosys. What do

these firms have in common? These firms have Zero debt.

A peek into the SnP index will give us more examples of

Zero debt companies which includes big names like Apple,

American Express, Amazon, Autodesk and Mastercard.

These are growth companies with a rising cash pile. From

our analysis we believe that Zero debt concept is a

developed habit, a ritual if we might call it.

There is no advantage worth mentioning in having a zero

debt. However, a company with zero debt need not keep

aside a portion of the profit to meet the cost of capital. They

get interest on their cash deposited with banks, adding to

their reserves. Also, they have low interest-rate risk. Also

zero debt firms can come out of a financial crisis better than

ones having a higher financial leverage.

On the other hand, it does not make any sense if a

company is funded with only equity. Debt as a source of

funds costs less and provides a high return to investors.

Infosys currently is growing at a pace that is relatively lower

than its counterparts in the industry. Hence according to us,

as the firm matures debt should be taken into consideration

as an essential source of funding.

“While financial leverage

can multiply returns to

shareholders, it can also take

down a company swiftly if

there is a liquidity crisis, or

even put a company into a

liquidity crisis (if a

counterparty decides to pull the

company’s credit line because

of its own liquidity issues). All

this, and, according to the

theories of Franco Modigliani

and Merton Miller, capital

structure in some cases will be

irrelevant to shareholder

returns.” – Vincent Ryan. (2012,

April 12). Why Not Zero

Leverage? Retrieved from

http://www3.cfo.com/

The Move : Nasdaq to NYSE As we have seen earlier, in the year 1999, Infosys became

the first Indian company to get listed on Nasdaq. On

December 12th , 2012, Infy as part of a strategic decision

transferred its American Depository Receipts (ADS) to

NYSE.

In this section we answer the following questions:

1. How does NYSE and NASDAQ work? What are their

main differences?

2. What is the advantage for infy to move from Nasdaq

to NYSE?

Europe is home to many investors, clients and employees

of Infosys. Hence one of the main reason why Infosys

delisted from Nasdaq and got itself listed in NYSE is to

leverage the NYSE- Euronext partnership to seek out listing

in Paris and London Stock exchanges.

Europe was becoming a strategic market for Infosys. Being

the first Indian company to be listed in NYSE Euronext

London, infy have indicated its focus on the market in

Europe.

11.6% of Infy’s total outstanding shares comprises of ADS.

22% of Infosys revenues in the financial year 2013 came

from Europe. Hence this move made sense when it came

to develop better Europe links. This tie up ensured that the

stocks are more accessible to a larger pool of investors.

This move will also result in a better brand recall and

recognition among investors and clients in the European

market.

An alternative Infosys had was to issue new securities in

the eurpoean markets. But that would change the capital

structure of the company.This delisiting and listing process

did not have any impact on the capital structure of the

company. The float and share/ADR count remained the

same.

Infosys was also present in the

Nasdaq 100. Its exodus from

the index created space for

Facebook Inc. to get listed in

the Nasdaq 100.

“This (listing in NYSE) will also

empower our investor base and

increase the trading window

available to our global

investors” – Infosys Annual

Report 2012-13

"Shifting of the shares from

Nasdaq to NYSE Euronext does

not mean anything for an

existing investor, but from the

management perspective, it

probably gives them more

visibility in Europe, where they

are looking to expand,

especially in markets like

France and Germany," - Analyst

NASDAQ VS NYSE

Acronym for National Association of Securities Dealers

Automated Quotations

New York Stock

Exchange

Location A telecommunications network Trading floor in New

York City

Market type Dealer’s market Auction market

Process of Trade

Execution

Broker contacts market maker or uses

online form

Broker contacts

specialist floor trader

or enters it into DOT

system

Trading

schedule

Weekdays 9:30am to 4:00pm ET; a pre-

market session 7:00am to 9:30am and

post-market session from 4:00pm to

8:00pm

Weekdays 9:30am to

4:00pm ET

Perception High-tech market Well-established

Stock types More volatile and growth oriented More stable

Entry fee for

stock listening

$50,000 - $75,000 Up to $250,000

Yearly fee Around $27,500 Capped at $500,000

Public or private Public Public since 2006

Total market

cap of

companies

listed

$4.44 trillion as of Jan. 2012 $14.242 trillion as of

Dec. 2011

Year launched 1971 1792

CEO Bob Greifeld Duncan L. Niederauer

Infy Share Buyback : To Buy Or Not To Buy A week back, former CFOs, V Balakrishnan,Mohandas Pai

and former senior VP, D.N Prahalad recommended an

immediate buyback of shares worth Rs. 11,200 crore to

restore investor confidence in the company stock. Infosys

share rose as a result of this buyback demand.

With no debt in its balance sheet Infosys has not yet

expressed any strategy to use its cash efficiently. Infosys

has never been appreciated as an aquirer and has over Rs

30,000 crore in cash. While Infosys shares where up by

22% in the last 3 years, rival firms have grown at a much

faster rate. TCS for e.g jumped 120%.

In this section we try to analyse the advantages and

disadvantages of such a move:

The main advantage of a buyback is that it reduces the

equity of the firm which in turn raises the EPS (Earnings per

share). Having a lot of cash can seems like a good idea but

holding on it and not using it for investments can be an utter

waste. Infosys has always been very conservative. Hence a

cut in the cash from its balance sheet can result in the

management paying more attention to opportunities out in

the markets.

On the contrary, the company can afford to take risks for

expansion and growth purposes with a huge cash cushion.

In order to compete with top IT companies in the world,

Infosys could leverage its cash pile.

The executives who have left the company still hold the

stocks and we cannot deny the fact that this move

suggested by them is for their own self interests. The

shareholders rallying for this move want the company to

offer them a 8 % premium over the existing price too.

“Infosys today is seeing a major

transition from a founder-

driven company to a non-

founder driven

company...While the change is

inevitable, the abrupt nature of

the change raises some serious

concerns not only in our minds

but also with many

stakeholders,” – Letter from

Mohandas Pai, V Bala and D.N

Prahlad.

Infosys believed in increasing

shareholders' wealth but in the

past three years, its stock has

heavily underperformed and

has resulted in wealth

destruction- The trio said in the

letter.

Infosys is the guiltiest among

its peers for stock-piling cash

and depressing shareholder

returns. Infosys has been

spending the most on capex

despite lowest revenue growth.

As a result, its RoE is now the

worst among the top-6

companies- Ambit Analyst

Should there be any

development that will impact

our shareholders, we will

immediately inform the

regulatory bodies and

shareholders on priority." – Infy

in response to the letter