8 April, 2004
Infosys Technologies Ltd.
Analyst:
Dan Konigsburg
London
Tel. +44 (0) 20 826 3814
Email: Dan_Konigsburg@
standardandpoors.com
Revathy Sreedharan
Bangalore
Tel. +91 80 558 0899
*For important information
on Corporate Governance
Scores, including Country
Factors, please see the last
page of this report.
India
Overall Company Score (CGS) CGS–8.6 (maximum CGS–10)
Sovereign Credit Rating* BB/Stable/B
Component Scores:
Ownership structure and external influence 9.0 (maximum 10)
Shareholder rights and stakeholder relations 8.3 (maximum 10)
Transparency, disclosure & audit 9.2 (maximum 10)
Board structure and effectiveness 8.0 (maximum 10)
Executive Summary
Infosys is a large software company, based in Bangalore, India, specializing in customized
software and development solutions. The company provides business consulting, systems
integration, and application development to multinational companies using its proprietary
“Global Delivery Model,” which divides large projects into components that are then
completed in different parts of the world, including India and the US. Infosys clients include
U.S. corporations Northwestern Mutual Life Insurance, VISA, and retailers Nordstrom and
JCPenney, and Japanese companies like Toshiba.
Infosys has used its corporate governance practices and in particular increased transparency,
as a distinguishing competitive feature for several years before its Nasdaq Listing. Given that a
majority of its business is based in the US, Infosys believes that leadership in corporate
governance will inspire confidence among its current and potential customers and employees
both in its home market of India and in Western markets, where it may be less well-known.
The company’s governance policies are more robust than those promoted by India’s domestic
corporate governance codes, even the most recent guidance on audit committees, a SEBI
committee led by Infosys’ own chairman.
For a cash-generative company with no debt on its balance sheet, there would seem to be
little need for a US listing, but the company clearly saw this as an important step to build
brand equity among its US client base, create a currency for acquisitions, and allow the grant
of employee stock options in a US-registered security in order to compete for US-based talent.
Since its listing, Infosys has decided to comply with all US securities laws, even those that do
not apply to it as a company not incorporated in the US. Except for parts of Rule 16(a) of the
Securities Exchange Act 1934 (See Section 3.1), Infosys behaves as if it were fully regulated by
the SEC, though its corporate law remains, of course, Indian. It submits all SEC filings
electronically through the EDGAR system, including annual and quarterly reports and even S-8
filings about employee stock option awards. It also files each of these reports within 60 days,
even though filing deadlines have until last year been more generous.
Infosys has scored strongly or very strongly in each of Standard & Poor’s four sections of
analysis. Its Ownership Structure is transparent and well disclosed, and there is a strict
separation of ownership from control among the founder/managers of the company. Financial
Stakeholder Relations are also assessed strongly: though shareholders cannot legally vote for
all items by post (see Section 2.1, below) or the internet, ownership rights are strongly
defended, there is a simple share structure, and there are no explicit anti-takeover defenses in
the company’s Articles. Financial Transparency and Information Disclosure is assessed as very
strong: financial and non-financial disclosure is very strong and in some cases Infosys provides
thoughtful disclosure on items that few other companies have pursued; timing and access to
disclosure is very strong given the company’s compliance with the U.S. SEC’s Regulation Fair
Disclosure and its lobbying of the Indian regulators in this area. Board Structure and Process is
assessed as strong given the work that has been put in to date to bring onto the board a large
number of outside directors in a relatively short amount of time. The board is nearing
completion of its transition from an insider-dominated group of directors affiliated with a
founding group to a globally-representative, majority independent body. Although the board is
generally effective and cohesive, a number of aspects continue to develop including the
involvement of non-executives in strategy-setting and the balance between the roles of the
executives and non-executive directors. Compensation for non-executives, while among the
highest in India, risks encountering objections from domestic shareholders while at the same
time risks not being high enough to continue to attract the best-qualified director

Component 1: Ownership Structure and External Influence

Component Score—9.0
1.1 Transparency of Ownership
Infosys is a widely held company with a transparent shareholding structure. The company
discloses shareholdings by type and percentage.

Key Analytical Issues Assessment

Full disclosure of shareholding structure in public reports in terms of identifying major and Positive
majority beneficial shareholders /control right holders.
Where applicable, indirect holdings have been enumerated and explained. Positive

Infosys shares are widely held and its shareholding structure is transparent. In addition to
disclosing shareholdings by category, the company’s annual report also discloses a distribution
of shareholdings by size, class and categories of shareholders. Substantial shareholders are
disclosed down to the level of five percent. The largest single shareholder (Mr.Narayana
Murthy and his family) holds 6.7% of Infosys’ shares. Shareholdings of directors are
adequately disclosed.

1.2 Ownership Concentration and Influence

Influence of ownership is most strongly felt among the founder/managers of the company,
though strict separation between management and ownership is maintained, and the size of
these stakes is slowly decreasing.

Key Analytical Issues Assessment

There is a strict separation of management control and ownership control among the Positive
founder/managers. Much of this is held in place by a strongly felt culture of restraint.
The influence of founder/managers in a change in control situation remains untested. Neutral

Standard & Poor’s has seen evidence of a strict separation between ownership and control and
between the roles of founders as owners and as executives. The separation is reflected in the
absence of most personal benefits that would normally accrue to a founding executive (there is

Standard & Poor’s • Corporate Governance Score • Infosys Technologies Ltd. 2

only one company car, for example) and a culture that restricts deals with executives outside
the ordinary course of business. Undue influence of ownership is controlled by an active and
zealous audit committee and by both the internal and external auditors. Moreover, as the
founders may not receive stock options, their stake, which now stands at 26.62 percent, will
decrease over time as other options are exercised.

Category Number Of Voting power Number of shares held

shareholders (%) (million)
Foreign Institutional Investors 337 42.32 28.13
Overseas Corporate Bodies and Non 734 0.70 0.50
Resident Indians
Founders and their families 23 26.62 17.69
Mutual funds, banks and Financial 191 6.12 4.06
Institutions
Shares underlying ADS * 1 7.87 5.23
* Held by beneficial owners outside India

Name Number Of shares (millions) Percent of class

N. R. Narayana Murthy and Family 4.46 6.70
Nandan M. Nilekani 3.09 4.67
Emerging Markets Growth Fund Inc. 3.70 5.56
Merrill Lynch Capital Markets Espana SA SVB 2.48 3.73
Directors and Officers as a Group 14.94 22.48
Source: Inofsys Technologies Ltd., as of 31 December, 2003

Despite this, there is positive influence from the founders collectively, on everything from the
company’s culture of transparency to its long-term strategy. The extent to which this can be
maintained will depend to some degree on the continuity of current management. Indeed, one
of the few potential areas where influence might be negatively felt is in a change of control, as
there are reasonable questions about what would happen were a bid to be made that did not
coincide with the company’s (and founders’) values. For its part, the company has seized the
earliest opportunity to increase the limit on foreign ownership of its shares to 100 percent,
showing increased openness to a bid (See Section 2.3). Also, Standard and Poor’s assesses as
positive the recent amendment to the company’s Articles that removed protection for Mr.
Murthy’s position as CEO (managing director) providing he held at least five percent of the
company’s equity

8 April, 2004 • www.standardandpoors.com 3

Component 2: Shareholder Rights and Stakeholder Relations
Component Score—8.3
2.1 Shareholder Meeting & Voting Procedures
Infosys’s commitment to shareholder democracy is strong. The company supplies
comprehensive information to shareholders well in advance of company meetings. The
company’s website is accessible and informative.

Key Analytical Issues Assessment

The company informs shareholders of upcoming meetings sufficiently in advance (at least 21 Positive
days notice) to consider and execute their votes.
There is evidence of attempts to ensure that notice reaches beneficial shareholders before Positive
shareholder meetings.
Information sent to shareholders on the agenda for the meeting is generally comprehensive.. Positive
The company posts agendas and details of shareholder meetings on its website Positive
Shareholder’s meetings are usually held in Bangalore, the company’s city of incorporation. The Positive
proceedings of the shareholders meetings are web cast live on the internet..
There is a minimum share-ownership (one-tenth of shareholding or 100 members) threshold for Positive
shareholders to convene a special meeting (EGM). This threshold is consistent with the Indian
Companies Act and does not represent an unreasonable obstacle to those wishing to call a
meeting..
Voting by show of hands is required by law, a practice which may cause inefficiencies in voting, Negative.
including giving more weight to the votes of those present over those voting by proxy. Though
voting by poll is allowed, shareholders do not call polls for every resolution, nor does
management require this.
The company has introduced a “non-mandatory” postal ballot, which allows shareholders who Positive
cannot attend meetings to express a view on resolutions, though these ballots cannot be counted
under law.
Other methods of voting by proxy, such as electronic voting, are not allowed by law. Negative.

Infosys has well-established procedures for disseminating shareholder meeting information.

Registered shareholders are sent copies of the notice of meeting along with detailed
explanatory notes when there is special business, additional information on nominated
directors, a proxy form and an attendance slip. The notice clearly spells out voting procedures
at shareholders’ meetings and provides information regarding relevant documents that can be
inspected by shareholders. The company webcasts the meeting to enable shareholders across
the world to view the proceedings.
Voting at shareholder meetings is by show of hands, in line with Indian law. A poll is
conducted only if demanded by a member or a proxy holding at least one-tenth of the total
shares entitled to vote or by those holding paid-up capital of at least Rs.50,000. A proxy may
not vote except on a poll. However, a representative (as opposed to a proxy, a representative
exercises the rights of a corporate member as if it were an individual) can vote by show of
hands. As neither shareholders nor management insist that polls are called for every resolution,
members present at a meeting with just a few shares could have a greater effect on voting than
large shareholders who have sent their proxies for attending the meeting.
Indian law permits voting by postal ballot under limited circumstances, including where the
company proposes a share buyback, an acquisition, the appointment of new directors, or a new issue
of shares. Though not required by law, Infosys introduced a non-mandatory postal ballot system for
every agenda item at its 2003 meeting. Though these votes could not be used to calculate voting
results, they were announced during the meeting to highlight the opinion of those shareholders who
could not attend. Indian law does not permit electronic voting at shareholder meetings.

Standard & Poor’s • Corporate Governance Score • Infosys Technologies Ltd. 4

2.2 Ownership Rights & Takeover Defenses
Ownership rights are clearly stated and well protected. There are no obstacles to a legitimate,
value-enhancing bid for the company’s shares.

Key Analytical Issues Assessment

Ownership rights are secured via a transparent and independent registrar system; ADRs are in Positive
are administered by a reputable depository bank.
Share structure consists of only common shares and there are no classes of common shares. Positive
There is a provision for issuance of preference shares in the company’s charter, but it has not
been used.
Charter clearly establishes a one share, one vote standard. Positive
The company has a clearly articulated dividend policy and declared dividend payments have been Positive
made.
There are no super majority requirements that interfere with shareholders’ right to elect directors Positive
and ratify corporate actions.

There are no explicit anti-takeover provisions in the company’s Articles. The company has Positive
removed from its Articles protections regarding Mr. Murthy’s position that may have been
invoked during a takeover.

Rights attached to Infosys shares are secure and fully transferable. Karvy consultants, who
are reputable independent registrars and share transfer agents in India, are given charge of
shares of the company. The company’s ADR issue is administered by Deutsche Bank.
All ordinary (common) shares are equal; no preference is given to any particular holding.
Owners of ordinary shares have the right to vote, receive dividend payments, and in the case of
liquidation of the company, to receive proportional payment in turn.
Voting rights are laid out by the Companies Act of India, 1956. Shareholders vote on all
major company decisions including the election and removal of directors, appointment of
auditors, dividends, remuneration plans, article amendments, share buyback plans and major
acquisitions and disposals via either ordinary or special resolutions as laid out by the
Companies Act. Shareholders may also put forward shareholder proposals and convene
extraordinary shareholder meetings according to reasonable and well-articulated procedures.
The company has a clearly stated dividend policy of distributing up to 20 percent of profit
after tax, which it has followed. Infosys has been prompt in paying declared dividends. The
company’s Memorandum and Articles of Association do not have any explicit anti-takeover
provisions. The company has removed from its Articles a provision that, if invoked, could have
thwarted an otherwise value-enhancing bid. Section 107 of the company’s charter stated that
Mr. Murthy would not be required to stand for reelection as CEO (managing director)
provided he or his relatives held five percent of the company’s shares.
In line with the Indian Companies Act, a company cannot refuse any share transfer on the
pretext of a takeover threat or a possibility of change in management. Share transfers can,
however, be refused by the company’s board if good reason is given; including if the transferee
is not a desirable person in the context of the overall interest of the company. Any person
whose shareholding exceeds five percent should inform the company and the Securities and
Exchange Board of India (SEBI, the capital market regulator) in writing and must make an
open offer to remaining shareholders if shareholding exceeds 20 percent.
Hence, Infosys can only with great difficulty refuse any take-over attempt by any person
either by law or by provisions in its charter. Infosys has been proactive in this sense and
shareholders approved a management-sponsored resolution at its shareholder meeting in June,
2002, to increase the maximum limit on foreign holdings in the company from 49 to 100
percent, a change that would allow a legitimate takeover to succeed, including one by a foreign
company. Infosys proposed this change within months of India’s amendment of the Foreign
Exchange Management Act (FEMA), which permitted software companies to increase this
limit and made the change despite some opposition from local shareholders concerned about
how it might eventually affect the company’s nationality.

8 April, 2004 • www.standardandpoors.com 5

2.3 Stakeholder Relations
Relations with stakeholders appears to be moderately strong.

Key Analytical Issues Assessment

The company makes pro-active disclosures about its relations with various stakeholders, Positive
including employees and the local community.
There do not appear to be any problematic relationships between the company and its Positive
stakeholders.

Reporting on stakeholder issues at Infosys is adequate. The company contributes to The

Infosys Foundation, which is involved in various charitable works, and the Foundation reports
on its activities annually. There do not appear to be any problematic relationships between the
company and its employees, its suppliers, or other stakeholders.

Component 3: Transparency, Disclosure & Audit

Component Score—9.2
3.1 Content of Public Disclosure
Infosys uses its strong disclosure standards as a differentiator and as a way to gain competitive
advantage over its competitors. The company produces a very strong annual report, maintains
a comprehensive website and presents its financial statements according to multiple accounting
standards. Infosys has undertaken to disclose its financials and non-financials as if it were a
US-incorporated, SEC-registered company.

Key Analytical Issues Assessment

Financial statements are produced and audited according to Indian Accounting Standards as well Positive
as US GAAP. Abbreviated financial statements and notes are also produced in substantial
compliance with the GAAP of Australia, Canada, France, Germany, Japan and the United
Kingdom, though these are not audited.
Company financial statements are comprehensive and contain more than the relevant and Positive
expected information of a US-listed company. Infosys has undertaken to report its financials (and
non-financials) as if it were a US, SEC-registered company.
There is strong disclosure of minority interests, internal and related party transactions and there is no Positive
reason to suspect transfer pricing, or hidden transfers. Financial reporting is assessed as very strong.
Memorandum and Articles of Association are available on-line. Positive

The company has decided not to expense options until consensus is reached among regulators Negative
and competitors in its industry.

Infosys’ high disclosure standards are already widely recognized. The company quite early in
its development adopted a policy of enhanced disclosure to give it a competitive advantage in
developing trust and attracting investors, counterparties and importantly, in its industry,
employees. For Western companies however, devoting the amount of time and money to
disclosure that Infosys does would likely be unsustainable or of questionable use of
shareholders’ funds. To the suggestion that there could be too much disclosure, or a point of
diminishing returns, management strongly disagreed. As long as disclosure continues to be a
competitive advantage for Infosys, we see no reason to differ. It does seem, however, to be of
most use to an emerging market company with a US-centered client base.
Infosys’ annual report and 20-F filing to the American SEC are very comprehensive: disclosure
includes an exhaustive corporate governance review, financial reports in four languages and
reconciliation to eight accounting standards and much else besides. Content is both deep and
broad, allowing shareholders to gain a thorough understanding of the company’s and the
industry’s financial health, business strategy and corporate governance practices.
Infosys discloses the aggregate remuneration paid to each full and part time directors. The
company provides details about related party transactions undertaken during the year (for
example, accounts held in financial institutions where Infosys directors also serve). The

Standard & Poor’s • Corporate Governance Score • Infosys Technologies Ltd. 6

company’s website is presented in five languages (those of its major clients and investors) and
provides information about the various measures undertaken in areas of community service,
research, knowledge management and includes an interactive and comprehensive investor
relations section. In addition to US and Indian GAAP accounts, which are audited, the annual
report also contains summary financial statements prepared in substantial compliance with the
GAAP requirements of Australia, Canada, France, Germany, Japan and the United Kingdom,
each in their original language, and reports on its compliance with the respective corporate
governance standards of these markets again, in the original language. This level of disclosure
shows sensitivity to other countries’ standards for corporate governance, and not just those
Infosys has adopted or those adopted in the US. As well, this is disclosure that is tightly tailored
to the needs and expectation of Infosys’ investors and clients, based on their country of origin.
Infosys has adopted a number of disclosure standards that are not required of it or it has
adopted disclosure standards before they were required. For example, in the process of
obtaining its Level III ADR listing on Nasdaq, Infosys undertook to comply with all the
regulations that would be applicable to a US-incorporated company (except for parts of Rule
16(a) of the Securities Exchange Act 1934, which deal with reporting of insiders’ and directors’
trades, and for which compliance would open the company to liability claims – Infosys’ D&O
liability insurance does not cover trades in non-US registered securities). The company follows
several other rules related to information access that are not required of it (See Section 3.2
below). Infosys’ complied with the certification procedures under the Sarbanes-Oxley Act in
advance of its deadline, and is also on track for substantially early compliance with Section
404 reporting on internal control procedures under the Act.
In addition to the Annual Report, Infosys also publishes quarterly reports that are
distributed to all its shareholders. The quarterly reports include financials in accordance with
Indian GAAP (audited) and US GAAP (unaudited). Furthermore, quarterly reports include a
shareholder-information section, which gives detailed information about the exchanges Infosys
shares are traded on, shareholder complaints and other SEC filings like the 6-K.
Although Infosys has decided not to charge option expenses against its earnings under US or
Indian GAAP – preferring to wait until more consensus is reached on the issue – in terms of
Standard & Poor’s corporate governance criteria, this is assessed negatively. While it is true
that there is no clear and accepted guidance from regulators on the issue, it seems unusual for
Infosys to stay on the sidelines of a disclosure issue given the company’s leadership in other
areas of disclosure.

3.2 Timing and Access to Public Disclosure

Timing and access to disclosure at Infosys is very strong. The company has followed some
practices before it was required to and goes to some trouble to promote fair disclosure in the
face of restrictive local regulations.

Key Analytical Issues Assessment

Public reports are always filed on time and information is sent to shareholders in a timely Positive
manner.
Infosys makes substantial effort to ensure that reports and announcements reach a significant Positive
number of shareholders and investment professionals. These include live tele- and webcasts of
presentations, press conferences, and analyst calls.
Information on how to access corporate records and shareholder rights is clearly communicated. Positive
Publicly filed financial statements and reports are sent to shareholders in the form of quarterly Positive
and annual communications. In addition, the company’s website is comprehensive and provides
transcripts of analyst calls and copies of presentations to all interested parties. Information is
also available upon request at company headquarters.
Corporate records are available upon request from any shareholder at the corporate head office. Positive
Other documents, including the company charter, and By-laws, are available on-line.

Infosys’ standards of providing timely information to shareholders are very strong and in a
number of cases exceed local and US requirements. The company provides audited quarterly
results to its shareholders within two weeks from the close of each quarter and announces
when it will do so at the beginning of each year (Infosys announced its results for the quarter

8 April, 2004 • www.standardandpoors.com 7

ended 31 December, 2003, for example, on 9 January, 2004). Moreover, the company
publishes its 20F (10K equivalent) and 6K (10Q equivalent) filings within 60 days, even
though, until last year, SEC rules allowed more generous deadlines (From 2004, the SEC will
require filing within 60 and 35 days, respectively).The company offers a fax-on-demand service
immediately after announcement of quarterly financial results whereby those interested can
obtain financial performance details. Moreover, within an hour of each quarterly
announcement, the company uploads its financial statements onto its website. After the
announcement, the company makes itself available for television interviews that are of interest
to local shareholders. Infosys also hosts two earnings calls with analysts each quarter, the first
within four to five hours of announcement of the financial results, which is broadcast live on
its website.
Infosys meets all its statutory reporting deadlines. Its website is easy to find through search
engines and it is clear that the company uses it to communicate all important information to
shareholders and other stakeholders. Detailed presentations made to media, analysts,
institutional investors are displayed on the corporate website. Media releases are also posted
on the website and the entire site is regularly updated. Infosys has made all its SEC filings in
electronic form, and began doing so before SEC regulations required it of foreign issuers.
Finally, it is positive that the company has decided to follow regulation Fair Disclosure (FD),
the SEC’s rule governing selective disclosure, as if it were required to even though, as a foreign
private issuer, the rule does not apply to Infosys. Though Regulation FD remains controversial
(some have argued that it has had the effect of encouraging companies to disclose less), this has
clearly not been the case at Infosys.

3.3 Audit Process

Infosys’ Indian GAAP accounts are audited by Bharat S Raut and Company (a KPMG
affiliate), while the US GAAP accounts are audited by KPMG. An external firm of chartered
accountants carries out the internal audit. Oversight over the audit process, including that of
an independent, board-level audit committee, is strong.

Key Analytical Issues Assessment

The auditor is experienced and reputable, and has relevant industry experience. Positive
An audit committee consisting entirely of independent outside directors selects the auditor. Positive
There is an explicit, transparent and accountable process for selecting the auditor. Positive
The audit firm does not perform any consulting or other functions except for some minor work Positive
relating to legal requirements/visa related issues.
Control over auditor independence is closely maintained. While the company does not yet have a Neutral
policy governing employment of employees of its auditor, the company is in the process of
putting such a system in place.

Infosys’ auditors are appointed by shareholders on an annual basis, upon the recommendation
of the audit committee and the board of directors as a whole. The audit committee, whose role
has been clearly identified as one of monitoring audit independence, is composed entirely of
independent outside directors, with one exception. Standard & Poor’s saw clear evidence, in
interviews with committee members and in the minutes of the committee, of procedures and
practices that aim to maintain a high quality audit. Several of those who have worked with it
have commented to Standard & Poor’s that the present committee is among the most active
and engaged in India.
KPMG, the outside auditors, are reputable and well known, and the lead partner on the
engagement is a US partner recently relocated to India and fluent in both GAAP standards and
the latest in Sarbanes-Oxley related audit independence requirements. Neither internal nor
statutory auditors provide consulting or other services to Infosys, except for some minor
services provided by KPMG with respect to legal formalities (visa requirements) in countries
where Infosys is in the process of setting up offices. There is limited, specific disclosure about
the nature of these services in public reports.
The external auditors finalize their audit plan each year in consultation with the audit
committee. Quarterly reports are presented to the management for their comments and
responses. The full report is then discussed at a pre-audit committee meeting with the internal

Standard & Poor’s • Corporate Governance Score • Infosys Technologies Ltd. 8

auditors, the external auditors and company management. At this forum, management’s
response to each of the auditor’s findings are discussed and a summary exception report is
presented to the audit committee. The points to be put forward to the audit committee are
decided independently by the auditors without any influence from management. Standard &
Poor’s is satisfied that the audit committee also has access to this report of the auditors as well
as to any additional information they may wish.
Also of note here is the unusual role of the internal auditors. Though not uncommon in
India, outsourcing the internal audit function may present new problems of conflicts of interest
between internal and external auditors and may better allow a secretive management to hide
problems. No evidence of this was found at Infosys however, and Standard & Poor’s in fact
saw evidence that the presence of an external firm has raised issues that appear to strengthen
the work of the auditors.

Component 4: Board Structure and Effectiveness

Component Score—8.0
4.1 Board Structure & Independence
Infosys maintains a board with a majority of independent non-executive directors led by a lead
director, separate chairman and CEO positions, and structural features like audit, compensation
and nomination committees that do much of the board’s behind-the-scenes work.

Key Analytical Issues Assessment

A majority of the directors are non-executive and all are judged as independent. Positive
Five of the seven executive directors are founders of the company. Neutral
Though the Chairman is an executive and founder of the company, the CEO and Chairman Positive
positions are separate and there is an identified lead director.
There are Audit, Remuneration and Nomination Committees, all of which are highly independent. Positive
Board size is relatively large in comparison with other major global companies See Analysis

The Infosys board has a clear majority of independent, non-executive members, a separation
of the Chairman and CEO positions, and independent board committees. Directors represent a
diversity of backgrounds and skills and all of the outside directors are judged to be
independent (The newest director was employed by the company’s auditor until one year ago,
but did not work on the Infosys audit). For its part, Infosys, which has adopted a stricter
definition of independence than has heretofore been required of it as a Nasdaq listed company,

Full Board and Major Board Committees (after 2003 AGM)

Executive Non-executive (Affiliated) Non-executive (Independent)
Full Board 7 0 8
Audit Committee 0 0 6
Compensation Committee 0 0 4
Nomination Committee 0 0 5
Investors Grievance Committee

discloses that all eight of its non-executives are independent in all material respects.
Given the executive chairman and founder, the board has decided to appoint a lead independent
director to whom other non-executives may approach with concerns. The Chairman is joined on the
board by an additional four executives who are also founders of the company. We also note that
Ms. Rama Bijapurkar, one of Infosys’ non-executive directors, also sits on the board of Crisil, a
local rating agency which assisted Standard & Poor’s with this Corporate Governance Score.
The board is relatively large compared to other global companies, reflecting the company’s desire to
increase the number of outside directors while allowing executive directors to leave by attrition. There
is a desire on the part of current management to maintain a significant executive presence on the board
to, among other reasons, provide incentives to future managers, and has received permission from the

8 April, 2004 • www.standardandpoors.com 9

Indian central government to exceed the legal limit on board size in India, of 12 members. The board
has taken steps to ensure that its size does not unnecesarily impact its effectiveness.

4.2 Role and effectiveness of Board

The board has nearly completed its transition from an insider-dominated group of founders five
years ago to a globally representative, majority independent body, led by its non-executives. The
board appears to be meeting the challenge of incorporating these new outside directors with long-
serving board members. There is a clear interest in increasing board effectiveness and this was
reflected in Standard & Poor’s meetings with directors. This is not an overly formal board –
discussions are candid, open and uninhibited.

Key Analytical Issues Assessment

The Board has articulated for itself a set of matters reserved for its decision. Positive
Directors are expected to perform a variety of roles, and there is clear thought given to how non- Positive
executives participate on this board.
There is clearly defined leadership defined for the non-executive directors.. Positive
The board appears to have settled some debate over issues relating to board functioning and Positive
board role.
The director selection process includes explicit consideration of independence. The process Positive
includes evaluation of monetary, financial and or commercial relationships with the company
that might lead to conflict of interests. Qualifications and experience are also considered.
There are frequent, separate meetings for non-executives only, and separate meetings between Positive
the independent audit committee and the outside auditors.
Interviews, a review of board minutes, and a review of the number of other board memberships Negative
held, indicate that several directors have outside commitments which may interfere with the
quality of their involvement.
The diversity of backgrounds and opinions among the outside directors is both a strength and a challenge. Neutral
The non-executives have taken pro-active steps to ensure their independence from management. Positive
Non-executives complete annual self-evaluations and, as part of the process, provide a review of Positive
their contributions to the board during the year to their other non-executive colleagues.
Succession policies for the Chairman and CEO remain somewhat limited, given their status as company founders. Negative

Relationships that external directors have with the company are limited. Positive

An analysis of the current Infosys board shows the results of a transition from an insular board
dominated by its Indian-based founders and other insiders to an outward-looking body with a
majority of outsiders from a variety of backgrounds and geographies. Infosys added its first outside
directors in 1997 and many of its current non-executives have served on the board for less than
three years. As a result, the board is in some ways still digesting its new outside directors.
Standard & Poor’s met with all but four of the directors (and all but one of the non-
executives), and found an active, engaged, and questioning board of directors. Members
appear confident and involved in a wide variety of issues, including those of internal control
and risk management, review of strategy and business development, and management
oversight. Several directors have built deeper access to management, encouraged by the
chairman. Moreover, all directors pointed to the uninhibited nature of board discussions – few
believe there are any topics that could not be raised at board meetings.
With its growing size and diversity, the board has adapted to the need for greater formality
and more explicit procedures at meetings, though directors have carefully balanced this with
innovations such as day-long pre-board meetings and weekend offsites where more
unstructured discussions can take place. Historical ties among the founders may not have
lessened, but these have been balanced by more empowered non-executives .
Many outside members assist the company through unpaid networking or door-opening;
others provide ad-hoc expertise to management in their respective fields. Management also uses
its non-executives to receive more frequent feedback about strategic and other issues.
We also note the unusual role of Mr. Narayana Murthy himself. As the most prominent
founder of Infosys, his resignation from the CEO position to executive chairman and “chief

Standard & Poor’s • Corporate Governance Score • Infosys Technologies Ltd. 10

mentor” in 2001 emphasizes his interest in maintaining the company’s values and grooming
others to take on leadership positions as the company grows. On the board, he has helped to
build consensus among its members behind the scenes, though this role has lessened with the
appointment of Deepak Satwalekar as lead director. Mr. Murthy spends a good deal of his time
traveling and acting as an ambassador for the Infosys brand; as a result, though he is nominally
the board chairman, leadership of the board is in practice shared with the lead director.
The relationship between the CEO and the Chairman is also an important one at Infosys and, in this
respect, it helps that Mr. Nilekani and Mr. Murthy have been business partners for over 20 years and
know each other well. Standard & Poor’s has seen evidence that Mr. Murthy has in fact stepped down
from the role of CEO and is allowing Mr. Nilekani to run the company. Moreover, discussions with
non-executives have shown recognition of the importance of this distinction on the board and among
senior executives. Equally, there is little of the “superstar CEO” culture at Infosys.
Directors evaluate their own performance on a regular basis, though we note that there is no
evaluation of the board as a whole. While individual evaluations might be divisive on other
boards, there is no evidence of this here. The board has in place a formal training program that
allows new directors without industry experience to familiarize themselves with the company’s
departments, products and strategies, and which appears to be effective and well-received.
There are procedures in place that allow directors to seek outside advice if needed.
Several directors hold a large number of directorships in addition to their commitment to
Infosys. Though not all of these are other public companies, four of the eight outside directors
serve on seven or more boards, and two serve on more than 11. Few of these directors are
professional non-executives without a full-time commitment. Moreover, one of these directors
(who serves on 20 boards, according to the company’s 2002-3 annual report, which fact raises
serious concerns on its own) has attended less than half of all board meetings in the past two
years and has not attended annual shareholder meetings. Infosys may value insights busy
directors may bring outside of board meetings, but we question the time these directors have to
devote to the mundane but critical tasks of monitoring management’s actions.
Finally, one of the challenges this board will face in the medium term will be to continue
integrating its diverse directors and, by doing so, to set an example for the rest of the company
as Infosys itself becomes more global.

4.3 Director & Senior Executive Compensation

Infosys’ annual report details its executive compensation policy. The Compensation Committee is
clearly independent and has taken steps to link executive pay to increases in shareholder value.
While Infosys has used options to strongly motivate its employees, it has done so in a measured
and moderate fashion, with little concentration of awards to top executives.

Key Analytical Issues Assessment

Compensation for executives and senior management is both cash and share based. Executive Positive
pay is generally aligned with shareholders’ interests..
Compensation policy is based on egalitarian principles and there is less concentration of stock Positive
option awards to senior executives than at competitor companies..
The board’s Compensation Committee makes decisions on compensation issues and is highly Positive
independent.
Company founders have consistently declined stock option grants (even before the practice was Positive
disallowed under Indian securities regulations), believing that their stake in the company
provided sufficient incentives and alignment with shareholders’ interests.
Stock option plans do not contain performance hurdles for exercise to ensure payouts on real Negative
increases in performance.
Compensation for non-executives has increased recently, making it among the highest in India, Positive
and more competitive on a global level.

The approach Infosys has taken to executive pay is rooted in the modest and egalitarian
‘middle class Indian’ values espoused by its founders. While the original seven partners have
become wealthy via their equity stakes (their collective 26.62 percent stake in the company has
a market value of approximately USD 3.2 billion), they have insisted on modest annual salaries

8 April, 2004 • www.standardandpoors.com 11

for themselves in line with Indian, not Western standards, and have never received stock
option awards (founders have voluntarily declined option grants since before a 1998
regulation prohibiting company founders from receiving stock options was approved).
Moreover, the CEO and Chairman have both made public statements that the highest paid
individual at Infosys should not earn more than a small multiple of the salary of the lowest-
paid professional at the company – at the moment, according to the chairman, somewhere
between 10 and 15 times. Indeed, no India-based executive director earns more than USD
42,000, even though several US and European-based executives earn up to USD 243,000.
Executives also receive annual, performance-linked bonuses. This approach to pay is reflected
throughout the organization; salaries at all levels are in line or slightly lower than Infosys’
peers within India, yet the company’s collegial working environment and aggressive culture
continues to attract large numbers of applicants.
This modesty has not, however, dampened the company’s enthusiasm for stock options as a
way to provide significant wealth for its employees. Options remain an important motivator
and a way to create real wealth among its employees. There are two stock option plans in
operation at Infosys (a previous plan is now closed to further awards). Terms cover grants
made at market prices (the US plan, in line with local practice for ESOPs, allows a 10 percent
discount), a cap of 6,000 awards to any one individual under both plans, restrictions against
repricing of options and typical ten-year terms. One unorthodox feature: there are no post-
grant performance requirements for option exercise -- removing additional incentives to
increase the share price after the option grant.
The total number of shares reserved for grant under existing option plans, together with
those already granted but not yet exercised, totals 7.9 million shares, or 12.0 percent of shares
outstanding. The overhang, or the dilution to existing stakes that shareholders can expect from
outstanding options, is 6.6 million shares, or 10.0 percent of shares outstanding. These
numbers are high compared to some industries and many countries, but they are slightly
conservative for the software industry and, in particular, the software industry in the US,
where Infosys competes most strongly for talent. Infosys may be viewed as more responsible in
its administration of its option programs however, in that awards are broadly granted --
concentration of awards to top executives is more muted than at its US competitors – and, as
explained above, the founder-directors do not receive options, reflecting current law as well as
their belief that such awards would unnecessarily duplicate the incentive already provided by
their equity stakes.
Compensation policies at Infosys are also underpinned by an independent compensation
committee, which plays a key role in setting compensation policy, administers both stock
option plans, and which has clearly limited the influence executives have over their own pay.
Infosys has even contradicted the cynic’s dictum that a CEO should never put an academic on
his compensation committee (and, until recently, Infosys had two). Infosys also distinguishes
itself from its US and other competitors by putting all executive director contracts, including
salary and bonuses, to shareholders at AGMs, as Indian company law requires. There are no
loans outstanding to executive directors.
Compensation for non-executive directors is decided by the board’s compensation
committee, and is set at an annual USD 37,500 for each director in addition to small grants of
options. While these fees are among the highest in India, they appear both necessary and
adequate to attract and retain directors that meet the company’s global ambitions. High non-
executive fees, however, risk objections from domestic shareholders, and they may
uncomfortably exceed the combined salary and bonus of many senior executives.

Standard & Poor’s • Corporate Governance Score • Infosys Technologies Ltd. 12

Corporate Governance Scores

A Corporate Governance Score (‘CGS’) reflects Standard & Poor’s assessment of a company’s corporate
governance practices and policies and the extent to which these serve the interests of the company’s
financial stakeholders, with an emphasis on shareholders’ interests. These governance practices and policies are
measured against Standard & Poor’s corporate governance scoring methodology, which is based on a synthesis
of international codes, governance best practices and guidelines of good governance practice.
Companies with the same score have, in the opinion of Standard & Poor’s, similar company specific governance
processes and practices overall, irrespective of the country of domicile. The scores do not address specific legal,
regulatory and market environments, and the extent to which these support or hinder governance at the company
level, a factor which may affect the overall assessment of the governance risks associated with an individual
company (see below ‘Country Factors’).

A CGS is articulated on a scale of CGS 1 (lowest) to CGS 10 (highest).

CGS 10 and CGS 9—a company that, in Standard & Poor’s opinion, has very strong corporate governance
processes and practices overall. A company in these scoring categories has, in Standard & Poor’s opinion, few
weaknesses in any of the major areas of governance analysis.

CGS 8 and CGS 7—a company that, in Standard & Poor’s opinion, has strong corporate governance
processes and practices overall. A company in these scoring categories has, in Standard & Poor’s opinion,
some weaknesses in certain of the major areas of governance analysis.

CGS 6 and CGS 5—a company that, in Standard & Poor’s opinion, has moderate corporate governance
processes and practices overall. A company in these scoring categories has, in Standard & Poor’s opinion,
weaknesses in several of the major areas of governance analysis.

CGS 4 and CGS 3—a company that, in Standard & Poor’s opinion, has weak corporate governance processes
and practices overall. A company in these scoring categories has, in Standard & Poor’s opinion, significant
weaknesses in a number of the major areas of governance analysis.

CGS 2 and CGS 1—a company that, in Standard & Poor’s opinion, has very weak corporate governance
processes and practices overall. A company in these scoring categories has, in Standard & Poor’s opinion,
significant weaknesses in most of the major areas of analysis.

GovernanceWatch
A ‘GovernanceWatch’ designation may be used to highlight the fact that identifiable governance events and
short-term trends have caused a CGS to be placed on review. GovernanceWatch does not mean that a change to
the CGS is inevitable. GovernanceWatch is not intended to include all CGSs under review, and changes to the
CGS may occur without the CGS having first appeared on GovernanceWatch.

Country Factors
Although Standard & Poor’s publishes country governance analyses from time to time, it is important to note that
Standard & Poor’s does not currently score individual countries. However, consideration of a country’s legal,
regulatory and market environment is an important element in the overall analysis of the risks associated with
the governance practices of an individual company. For example two companies with the same Company Scores,
but domiciled in countries with contrasting legal, regulatory and market standards, present different risk profiles
should their governance practices deteriorate i.e. in the event of deterioration in a specific company’s governance
standards, investors and stakeholders are likely to receive better protection in a country with stronger and better
enforced laws and regulations. However, in Standard & Poor’s opinion, companies with high corporate governance
scores have less governance related risk than companies with low scores, irrespective of the country of domicile.

In the absence of specific country governance scores, the sovereign credit rating can serve in many ways as a proxy.

Important Note

A CGS is based on current information provided to Standard & Poor’s by the company, its officers and any other sources Standard & Poor’s
considers reliable. A CGS is neither an audit nor a forensic investigation of governance practices. Standard & Poor’s may rely on audited
information and other information provided by the company for the purpose of the governance analysis. A CGS is neither a credit rating nor a
recommendation to purchase, sell or hold any interest in a company, as it does not comment on market price or suitability for a particular investor.
Scores may also be changed, suspended or withdrawn as a result of changes in, or unavailability of such information.
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