CASH HOARDING AT INFOSYS

Anusree Balakrishnan – BD20011

Case Background
In 2017, Vishal Sikka, Infosys' CEO, and Ranganath D. Mavinakere, the company's CFO, met in Bangalore
to discuss the company's frequent clashes with shareholders over the amount of cash it had on hand,
which totaled Rs. 28,796 crores. Stockholders wanted the company to continue to expand as all seven
promoters retired, and Balakrishnan (Former CFO of Infosys) and Mohandas Pai (Former BOD) stoked
shareholder dissent by demanding that the money be returned rather than wasted.

Problem:
Vishal (CEO) and Ranganath (CFO) had to make a call about how to deal with these issues. Is it a smart
idea for them to start paying investors more money? And, if they are required to return, how much will
they have to pay and how will they pay it? They could make a profit, but they couldn't decide whether
they wanted to make a big, one-time profit or a small profit over time. They can also consider a
repurchase bid for a part or all the purchase prices. They may also sell preferred stock (at a discount) to
any existing holder, entitling that individual to a yearly benefit of Rs. 100. They may decide to keep their
capital, however, due to the need to continue investing in new technology and the vulnerabilities of
their item showcases.

Alternative solutions to be considered.

 Cash Position
 Cash Dividend
 Bonus Stock

Criteria used to choose among derivatives:

• Dividend pay-out ratio: This is the proportion of the total amount of dividends paid to shareholders to
the company's net income. It is the percentage of earnings distributed to investors in the form of
dividends.

• Incremental dividend: An incremental dividend is a series of increases in the amount of dividend paid
to shareholders by a company. We've noticed that the number of dividends paid by Infosys hasn't been
steadily rising or decreasing since September 2015.

Analysis and Solution

Growing the dividend, introducing previously deferred wage increases, or making a major acquisition are
all possibilities. Despite the company's weak results since 2016, paying cash dividends to shareholders
would send a message to investors that the company plans to perform well in the future. Investors like
businesses that have a high growth rate and produce a reasonable amount of cash flow.
Unlike Microsoft and other multinational companies, the company has never divided its stock. It had
only done it once before, so it was free to take a different path this time. It will raise its dividend pay-out
ratio by paying dividends, with pay-outs of up to 70% of free cash flow expected in the following
financial year.

One option that the company will follow is cash and stock dividends. If only cash dividends were paid,
the company's cash would be exhausted. The firm, on the other hand, will give shareholders the option
of a cash or stock dividend. Stock dividends are also taxed at a lower rate.

If a non-linear purchase is made, it should be in the $300-400 million range, ideally for a software
product platform. A less expensive purchase would have no effect. Infosys would be able to better
leverage its cash and accelerate its transition to a non-linear model if it were to be acquired (i.e.,
decoupling revenue growth from manpower growth).

Due to the increasing demand for AI-based services such as personalised health, education, and financial
services, the company would rather invest in R&D than buybacks.

A business must earn about 14-15 percent annual returns to justify the cost of equity capital; the cost of
assets on the balance sheet must be equated only with what 'cash' will earn. The rate in India is about 4-
5 percent. Cash just needs too much return to break even. Therefore, it is not an unyielding asset on a
company's balance sheet, contrary to common opinion. To figure out how much capital a company
needs, it must produce a high return on equity by investing it in its operations (so having a lot of cash
isn't a problem).

Buybacks of shares are subject to income tax due to capital gains. Since buying back existing shares, it
couldn't sell new ones for at least six months. DDT had to be charged in the case of dividends, even
though the company was not required to pay any tax on its income.

Investors would rather the business retain the money and reap long-term capital gains if the dividend
tax were higher. As a result, money that would have been invested in small companies in need of
funding is being kept in reserve.

India has a dividend payment tax, which means that companies must pay a 16 percent tax on dividends
paid out, while investors get a tax-free pay-out. The reduction in cash yield and increase in earnings yield
makes a much stronger argument for a share buyback due to a sharp contraction in the price-earnings
ratio. It is now less profitable to keep money in the bank than to purchase stock for a company.

From a shareholder's perspective, the government's tax policy has made buybacks much more
appealing.