Transparent Profits

IT'S a company that believes in being different. And Bangalore-based software developer Infosys Technologies Ltd certainly underscored this difference with its reaction to the CII committee for corporate governance report—a report that had created a buzz in corporate accounting circles when it was released last fortnight. Under the transparent disclosure norms, company reports should include a management statement, additional shareholding information as well as a segmentation analysis. And the certificate should be signed by the firm's CEO stating that the management is responsible for preparation integrities. While most companies are still pondering over the effects of such transparency on corporate policies, Infosys plans to write back to CII asking what more it could do—almost all the desired recommendations having been implemented by Infosys two years back.

The company has always believed in a different approach, whether in management, business development or HR policies. Which explains its use of innovations such as human resource accounting, brand valuing and ratio analysis in the annual report—with a dash of the philosophy of success from Anil Kumble or Madhuri Dixit as in 1995-96, or on social responsibilities this year—and you have an Indian company that is in the business of matching global accounting standards.

The firm has been a trend-setter in disclosures and a leader in shareholder service. This year it has valued its brand using the brand-earnings-multiple model constructed by Michael Birkin. At Rs 172.83 crore, the Infosys brand is 1.2 times greater than its sales. "The Infosys model," says an analyst, "has to be quickly replicated".

In an entire section titled Additional Information, the 1995-96 annual report contains data about value-added statements, economic value additions, human resources accounting, information about the Infosys brand value, a chapter on ratio analysis about performance, profitability, efficiency, earnings and a commentary explaining the ratios. There's more. Like a chapter on shareholder information: movement of shares, volume of shares, investors' complaints, their number and the time taken to address them, as well as the distribution of shareholding plus a five-year perspective with statistics.

The human resources accounting, for instance, is unique to the Indian corporate system where only tangible assets are accounted in the balance-sheet. Under HR accounting based on the international Lev & Schwartz model, Infosys valued its HR by calculating the entire earning potential of each employee for the future and then discounted that to today's net present value of each employee for the future and discounted it to today's net present value of the company, which becomes the capitalised value of the HR.

Therefore, while Infosys has a market capitalisation of Rs 731.04 crore, the value of its 1,705 employees was put at Rs 278.55 crore, up from Rs 186.85 crore for 1,172 employees last year. So it is no surprise that the Infosys annual report for '95-96 was voted the country's best by the Institute of Chartered Accountants of India. In the preface to the annual report, chairman and managing director N.R. Narayana Murthy and joint managing director N.S. Raghavan wrote: "Infosys aims to be a global company, so we have taken yet another step towards global level transparency by voluntarily providing data accounting to Form 10-K of the Securities and Exchange Commission (SEC) of the US." T.V. Mohandas Pai, senior vice president, finance and administration, who is the architect of the Infosys reports, explains that the most stringent disclosure norms among capital markets around the world is in the US as the capital markets there are focused towards the individual, whereas markets in Japan and Germany focus on institutions. "Since we have a 23 per cent FII stake in our company, we wanted to give them a balance-sheet in a language they understand and so decided to follow the Indian and the US Generally Accepted Accounting Principles (GAAP) and also provide a Form 10-K," adds Pai.

By adopting the US GAAP, the prestigious NASDAQ-listing (National Association of Securities Dealers' Automated Quotations), Infosys has set its sights high. Besides signaling the arrival of the firm in the US software market, the listing will also allow Infosys to raise money from US markets and provide dollar stock options to its employees. And that, when it happens, will be a major step in the establishment of a global Indian company.