Book Of Revelation
Infosys Technologies Ltd, the Rs 143.81 crore, 16 year-old company, has given whole new meaning to Michael Porter's theory of differentiation. But this leading software exporters point of distinction is an unusual one: its annual report.
Infosys strategy of total transparency in its accounting systems has not only kept it one of the favourites on the bourses but helped its national and international operations as well.
What marks Infosys disclosure systems from other companies? Mostly the sheer level of disclosure. The annual report includes exhaustive evaluations of the fortunes of the company, and the past, present and future of the companys fundamental parameters of the company are carefully brought forward and explained.
The overriding spirit is one of voluntary disclosure. Points out Sunil Sharma, executive director, Haribhakti Financial Services, and a chartered accountant, Unlike most other companies we have here a company that has marked 100 per cent of its investments to market, despite the fall in market prices.
This reflects not only the companys confidence in its operations but also the fact that it does not want to mislead its investors by giving inflated historical values of investments. Very few companies mark their investments to market, especially in a fallen market.
This attitude is also reflected in the fact that the company has voluntarily presented its annual reports in the GAAP (or Generally Accepted Accounting Principles) format, which is the universal US standard of reporting.
This could be because foreign institutional investors form a major part of its investors (30 per cent) and that Infosys being primarily a software exporting company, more that 85 per cent of the revenues of the company are generated abroad, says Rajendra Chitale, managing partner, M P Chitale & Company.
As important, Infosys is probably the first Indian company to incorporate human resource valuation and the valuation of its brand in its balance sheet. This gives the investors a true and fair assessment of the value of the company, in terms of its assets, explains Sunil Sharma, adding, for software development companies, human resource is a key asset, and though it is an intangible asset, its value generally exceeds that of the tangible fixed assets of such companies. The same holds true for the importance and the value of brand for any company.
This also helps in terms of mobilising debt. In India, the amount of debt available to companies is determined by the asset coverage. In software companies, human resources have heavy revenue costs. But in the absence of human resource accounting this intangible asset cannot be capitalised. This artificially deflates the net asset base of such companies and reduces the amount of debt available.
Though Infosys is a cash-rich company and believes that retained earnings are the cheapest source of finance available, it has nevertheless accounted for its human resource pool (using the internationally accepted Lev & Schwartz model) to give a fair value of the company to its stakeholders.
The fact that Infosys has not gone for any new debt and has financed its operations through internal generations and liquidation of investments, reflects the managements confidence in the company's core competency of software development and exports.
This has also eliminated the involvement of creditors in the day-to-day operations, a situation many debt- seeking companies have to live with.
The transparency in Infosys annual reports is also clearly brought out by the fact that unlike most exporting companies, the foreign exchange income from export sales are not converted at respective month-end exchange rates. Infosys does not believe in inflating its earnings by delaying the accounting for its foreign currency income from exports, and these are effectively accounted for at the exchange rate prevailing at the time of receipt of payments.
Infosys is also one of the few companies that religiously publishes its report on time and the first Indian company to make it available on CD-ROM.
The annual reports go beyond clearly spelling out all the management policies and give some kind of a strategy trajectile to investors. All the models used for the evaluation of brands and human resources are clearly explained in the annual reports.
Take for example, the Lev & Schwarz model for valuation of human resources, which was explained in their last years annual reports, when this practise was first started.
The spirit of transparency also informs its investment policies. There have been no unrelated diversification, nor are surplus funds invested in other companies shares. Infosys has liquidated all its previous years current investments and its surplus funds are invested only in the short-term instruments and inter-corporate deposits of rated, financially sound companies.
Says Sharma: The possibility of dubious or unethical transactions and any window dressing of balance sheet has been eliminated from the companys operations because of the managements policy of restricting the value of purchases from related companies and from companies in which Infosys directors have any interests to Rs 50,000.
Notably, there are no investment companies through which promoters of most Indian companies siphon off funds.
The important point about the level of disclosure in Infosys annual reports is that, as Chitale points out, it is beyond the call of legal obligation. This has also built up a large degree of goodwill and brand image for the company, which has differentiated it from other companies.
The strategy also makes good sense in the long term. One index: the steady rise in the price of the scrip, from around Rs 75 in June 1993 to around Rs 1,850 today. In fact, last year, the Institute of Chartered Accountants of India (ICAI) awarded the silver shield for the best presented accounts to Infosys, in the process recognising the managements efforts in creating a positive spiral of stakeholder orientation and transparency.
In the main, Infosys has realised early what few Indian companies understand today. That the market forces that industry clamours for are essentially driven by value systems.
As Chitale points out, Market forces, of which the investors constitute a very dominant part, are very strong and cannot be easily manipulated by the companies. Transparency and integrity become the inalienable parts of such markets.