Mr Rishi Sunak, his father-in-law and Infosys Limited
A case of bad politics
Everything is fair game in Love, War and Politics. The UK Prime Minister, Mr Rishi Sunak probably expects his opponents to attack his perceived weakness. One of these is his connection to Infosys Limited. Infosys is large Indian Information Technology Services Company which was co-founded in 1981 by Mr Sunak’s father-in-law N.R. Narayana Murthy. Mr Sunak’s wife, Akshata Murthy owns 0.94% of the company, a stake currently worth about GBP 618mn which, as the tabloid newspapers pointedly noted last year, made her richer than the late Queen. The stake generates an annual dividend of about GBP 12mn. No UK tax was paid on this at one time as the PM’s wife had elected (as she is legally entitled to) to declare her tax status in the UK was a non-domiciled resident.
It is unfortunate that Infosys Limited and Mr Murthy have been dragged into UK politics in a negative way. Anybody who studies the company would come to the conclusion that there is much to admire about Infosys Ltd and Mr Murthy.
To understand the full story, one needs to understand a little of the history of India’s economy and corporate structures after independence. The economic policy adopted by the Indian government after Independence has been described as the Licence Raj. India was run as a nominally capitalist economy but it operated under a socialist planning umbrella. Any company which wanted to start or expand in any significant business had to get a “licence” which were usually only awarded by politicians and bureaucrats in New Delhi.
The system gave a significant advantage to businessmen with political connections and the capacity and willingness to bribe. It might take a lot of time and money to get a licence but once it as awarded, you had a quasi-monopoly (those without a licence could not enter the market), consumers had little choice but to buy any shoddy goods that the licence holder produced, as imports were either banned or subject to high import tariffs. The decision whether to enter one business or another was not driven by business logic, but which licenses were available and what “cost”.
For a few decades , the Indian economy was like a controlled laboratory experiment where the normal forces of competition (domestic and global) were systematically excluded. The results were uniformly terrible. Companies which emerged were often multi-business conglomerates which looked like creatures from the Island of Doctor Moreau. Completely different businesses were stitched together in strange combinations which made no economic sense. India’s economic growth for the four decades after Independence was terrible and people were much poorer than they should have been. Consumers had to endure overpriced shoddy goods while there were waiting lists for “luxuries” such as telephone connections and cars. Businesses without political contacts or those who did not bribe were effectively excluded. By the 1970s it was clear the Indian economy was, like the Soviet one it greatly reflected, failing seriously.
This was the background when five computer engineers including Mr Sunak’s father-in-law, left safe corporate jobs and decided to start Infosys Limited in 1981. Mr Murthy did not have the GBP 300 for his share of the start-up capital and had to borrow from his wife. The business faced many challenges and there was every reason to think it would not succeed. The Licence Raj was almost designed to crush new companies. For example, Infosys needed some computers which had to be imported from the USA and paid for in hard currency. India had a perpetual foreign exchange crises and imports were severely restricted. Mr Murthy and his colleagues had to make countless trips to New Delhi to try to obtain the required licenses – a task made more difficult by their refusal to bribe.
Despite great odds, the company began to grow and prosper. The founders decided to raise money on the Indian stock market in June 1993. The IT Services industry was not well recognised and the share issue was not an immediate success. Mr Murthy reportedly gifted some shares to his driver. According to market lore, the man never sold and became a dollar millionaire many times over.
Like its economy, the Indian stock market was a strange place in the 1980s and early 1990s. Many companies were listed but founders held large stakes in listed companies with complex shareholdings within business groups which mixed listed and privately held companies. Reliable accounting, transparency, corporate governance and effective regulation were absent and market manipulation and insider trading were the norm. Businessman siphoned money from listed companies and manipulated share prices to the significant financial disadvantage of minority shareholders.
The promoters of Infosys decided to do things differently. They decided to behave ethically and had a firm belief that a good business performance combined with a reputation for honesty, integrity and fair dealing would result in a high share price. As a result, the founders as substantial shareholders would also get wealthy; their interests were completely aligned with those of minority shareholders. Infosys became the first Indian company to list on the Nasdaq Stock Exchange in the United States. Investors have done very well. An investor who bought the shares in June 1993 in the IPO and held them till today would have achieved a cumulative return of 34.25% per annum in US Dollar terms (even more in Indian Rupee terms) and this is equivalent to a return of 620,685%.
Infosys is a very important company and a highly respected and substantial enterprise. It has a market capitalisation of GBP 65 billion and employs 340,000 people. Throughout its history, almost all its earnings have come from outside India. Infosys and the IT Services Industry have earned substantial, vital foreign exchange for India.
In my view, it has been a unique and very important pioneer for at least three reasons, over and above its financial success.
1. Infosys showed, for the first time, that ordinary middle-class Indians without political connections could establish huge companies and generate huge wealth while behaving with the highest degree of integrity, honesty, and transparency. I have no doubt the example of Infosys inspired thousands of entrepreneurs and millions of investors in India. Today, talented young people increasingly want to start their own companies rather than join the Civil Service or large-established companies. This entrepreneurial spirit owes much to the vital example of pioneers such as Narayana Murthy and Infosys Limited.
2. Infosys showed Indian business owners that a reputation for ethical behaviour would be rewarded by the stock market and the resulting wealth would be much greater than would be made by manipulating markets or siphoning money. The Indian stock market today is not perfect but it is much better and fairer place for minority investors than it was 35 years ago. The credit for this belongs to regulators but companies like Infosys have also played a vital part.
3. Infosys showed Indians, perhaps for the first time, that Indian companies and workers could compete and win in the global market. This was transformational and it has resulted in a vital and significant boost in business confidence and self-belief in the country.
It is a pity that Infosys limited has been dragged into the cut and thrust party politics in the UK. As the above article shows, it does not deserve it.