Freedom to hedge critical, says Infosys CFO

Documentary evidence for hedging, especially for software companies, has to be reduced substantially, says T V Mohandas Pai, member of the board and chief financial officer, Infosys Technologies.

The country's first Nasdaq-listed billion-dollar IT company is irked with various legislative constraints involved in hedging its net foreign exchange in a manner it wants.

"If regulations allow, we can hedge our net foreign exchange for the entire year. But regulations in India do not. It calls for certain documentation. We are in discussion with the regulators to allow us greater economic freedom. Until recently, the economy was one where the rupee had depreciated. Today, it has appreciated by 11 per cent from its peak value. We are a global company and we have deal with global risks. The chance of it appreciating is there. Therefore, we should be given the freedom to hedge based on whatever risk management policy we will have," said Pai.

He made it clear that Infosys is not seeking any specific exemption. Instead, he feels that the freedom to hedge will indeed benefit companies like Infosys who are headquartered in India.

"We are a different kind of animal because 95 per cent of our revenues come from outside India and 50 per cent of our revenues are spent outside India. So, when our global competitors can hedge up to 100 per cent or 200 per cent of their revenues for 1-2 years down the line, why should we have constraints that we should hedge only 50 per cent of previous year's revenues," argues Pai.

Unlike in the past, the appreciating rupee is a big concern to Infosys. It has appreciated by 8.5 per cent last fiscal. From the peak in May 2002 (Rs 48.99 / dollar), the rupee has appreciated by 11 per cent. In fact, it appreciated by 4 per cent in March 2004.

In the case of Infosys, it occurred an exchange difference to the extent of 1 per cent. "We have incurred a 1 per cent difference in margins as we have provided credit for forward sales. As of today, we have hedged $203 million at Rs 44.60 per dollar. We are concerned about the strengthening rupee and we are looking at it very deeply," he said.

There is a clear difference in the way Infosys has considered the average Rupee while giving its guidance for this fiscal and the results for the previous fiscal.

"If you take the average rupee for fiscal 2004 and look at our guidance, there is a clear difference. The average for the previous fiscal was Rs 45.78, whereas for fiscal 2005, we have taken it as Rs 43.40. We have not factored any decline in the rupee for this fiscal in our guidance as we do not know how it will behave."

Pai said, "We accept the fact that the rupee (exchange rate) is determined by the market. We are not standing up and saying that the rupee should be a managed float or something, so we should have full freedom to hedge. Nowhere in the world is a there a cap on hedging. As global companies continue to set up subsidiaries in India, their needs are met by the parent company. They can borrow in rupee. We do not have this freedom as we are headquartered in India. Therefore, our earnings all over the world is controlled in India. When a company is making money in a certain currency, it is allowed to allowed hedge that currency. The risk involved in hedging has to be decided by the board of the company."

For the quarter ended March 31, 2004, Infosys' loss due to re appreciation is Rs 109 crore on the topline and for the full year, it is Rs 272 crore. The net impact for the fourth quarter has been Rs 41.25 crore in the negative. For the full year the impact has been Rs 111 crore in the negative.