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Why Narayana Murthy wasn't reclassified as public investor

By Pavan Burugula
February 23, 2017 17:05 IST
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Retention of Murthy within the promoter group was crucial for Infosys as the company believed the promoters’ relationship would help the company in difficult times

In 2014, when Infosys co-founder N R Narayana Murthy asked the board to reclassify him from promoter to public shareholder, the board persuaded him to continue as promoter, said sources involved in the discussions.

According to the sources, Murthy was not comfortable being responsible as promoter for various decisions the Infosys management would take as he was no longer a part of those decisions.

In 2014, when Murthy had written to the board to reclassify him as a public shareholder, the board had sought legal opinion on the matter. Eventually, it managed to persuade Murthy to put the request in abeyance as they felt he boosted brand value of Infosys.

One of the lawyers involved in the consultation then said the entire promoter group had made similar requests to Infosys but the board had requested them to stay on as promoters.

“This was one of the first instances where Murthy had a disagreement with the management. Murthy felt there was no point in being legally responsible for decisions the management made. Further, being promoter, he could also come under the ambit of insider-trading regulations. However, he was persuaded to stay,” said a source privy to the development. An email sent to Infosys on this issue remained unanswered.

Experts say retention of Murthy within the promoter group was crucial for Infosys as the company believed the promoters’ relationship would help the company in difficult times. FY14 was the last year Infosys clocked revenue growth of plus 20 per cent.

By FY15, growth was down to 6.4 per cent, Capitaline data showed. In such circumstances, an exit by a promoter could have triggered fears among shareholders and clients.

Infosys co-founders and their families together own 12.75 per cent in the company.

Under Securities and Exchange Board of India (Sebi) rules, promoters carry several responsibilities and have a considerable exposure to litigation in case anything goes wrong. Further, they come under the definition of “insiders” under Sebi Prohibition of Insider Trading Regulations, bringing their transactions under the market regulator’s scrutiny.

“There are scores of regulations not just under Sebi but also under the Companies Act which hold promoters responsible for any wrongdoing. In short, promoters can be pulled up for any wrongdoing that goes beyond negligence,” said Sandeep Parekh, founder, Finsec Law Advisors.

Murthy’s request to be classified as public shareholder had led Sebi to reconsider the regulatory framework around promoters. Until then, there was no formal procedure to reclassify a promoter.

The market regulator had floated a discussion paper on the subject in June 2015, specifying the circumstances under which such reclassification could be considered. However, the rules were kept rigid in order to prevent misuse.

“Sebi, through Listing Obligations and Disclosure Requirements Regulations, has permitted reclassification of promoters and promoter group under certain circumstances and has delegated the power to the stock exchanges to approve such requests.

Reclassification may be sought in case of an open offer, transmission/inheritance/succession, where the listed entity is being professionally managed and no person or group holding more than one per cent of the total paid-up capital on fully diluted basis, and, where the persons listed as promoters and seeking reclassification are not involved in the day-to-day management of the listed entity nor are in control of the listed entity, and conditions for the same have been prescribed,” said Inder Mohan, partner at law firm Shardul Amarchand Mangaldas.

Murthy owns 0.38 per cent stake in the company directly, while his family holds 3.44 per cent stake. Murthy’s family is the single largest shareholder in the company.

Photograph: PTI Photo

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Pavan Burugula in Mumbai
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