In 1990, there was an offer to buy us out for Rs 2 crore. Infosys has Rs 6.5 lakh crore m-cap now: NR Narayana Murthy on 1991 reforms

As India marks 30 years of economic liberalisation on July 24, Infosys founder NR Narayana Murthy spoke to Moneycontrol on how the context of 1991 changed the aspirations of Infosys in one go


JULY 21, 2021 / 01:49 PM IST



There was an offer to buy out Infosys for a paltry sum of Rs 2 crore in 1990. NR Narayana Murthy didn't want to sell and offered to buy out his co-founders. They decided to stay on. Today, Infosys is India's second largest software exporter, with a market capitalisation of over Rs 6.5 lakh crore.

It's a feat that would have been impossible without the determination of its founders and the economic reforms of 1991, which liberated companies such as Infosys to find its place in the market, as it did not have to lean on the government or the Reserve Bank of India (RBI) for permissions to travel abroad, import computers and had the freedom to devise an employee stock option plan that would spawn hundreds of dollar and tens of thousands of rupee millionaires.


As India marks 30 years of liberalisation on July 24, Infosys founder NR Narayana Murthy spoke to Moneycontrol on how the context of 1991 changed the aspirations of Infosys in one go and the next wave of reforms that can help galvanise India.

Question: Infosys was a 10-year old company when economic liberalisation was announced in 1991. What was it like running a company in the pre-liberalization era?

Answer: First of all, we were very small. Our aspirations, dreams, hopes, our horizon and our possibilities were all small. They were completely circumscribed by our context. We were in a small office in Jaya Nagar, a southern suburb of Bangalore. Lot of our time was spent in traveling to Delhi to obtain import license for our computer, computer accessories and software.

We spent much of our time at RBI offices in Mumbai, for obtaining foreign exchange for my younger colleagues doing projects abroad, since we did not have the required hardware in India. Importing computers those days was very tortuous. Banks did not understand software and wanted physical collaterals. We had none, as you know, so term loans and working capital loans from banks just did not exist for our industry.

Let me tell you a story of how the context can limit your possibilities. One of our customers was ready to lend us an IBM 4341 plug-compatible computer system, called Magnuson, costing about $300,000, for us to develop a major package for the apparel industry. This would have enable Infosys to create at least 50 jobs and train our youngsters on the most popular commercial computer architecture of the day, that is the IBM 4341 system.

All that our customer wanted was a telephone connection in our office, so that his officers could contact us daily, and we could send them faxes everyday and the progress of the project. But at that time, the first priority for telephone connection after the official needs of course, was for the homes of these government officers. Do you know what the second priority was? It was for the homes of the retired government officers.

Let me now tell you how our context limits our aspirations. Even after 10 years of hard work and sacrifice, none of my younger co-founder colleagues had graduated to own any visible signs of economic progress, like houses, cars and phones at home.

During 1990, as you perhaps know, there was an offer to buy us out for a small sum of Rs 2 crore -- that is $1 million at that exchange rate. When this offer came most of my colleagues were quite enthusiastic about selling the company. Today, Infosys has a market capitalisation of over Rs 6.5 lakh crore. That is why I said our context limits our aspirations.

Q. I'm glad you resisted any temptation to sell off Infosys, because look at the kind of wealth creation that it has managed to create over the years and as you said, it has a market cap of over Rs 6 lakh crore today. Can you share some anecdotes on the pain points pre-reforms that went away post reforms? For example, there was no current account convertibility, which meant you had to apply to RBI even if you had to travel abroad for a day. Importing a computer would take three years and multiple trips to secure permission.

A. Let me tell you an unbelievably bureaucratic story about my friend KV Ramani. KV Ramani is, as you know, is a successful entrepreneur, a friend of mine, who along with Nandan Nilekani and others founded NASSCOM. Ramani has also started a university called Sai University. Knowing how passionate he is about whatever he does, I am confident that Sai University will reach the top in the coming years.

Now Ramani applied to the RBI office in Chennai, in 1986, for foreign exchange to visit Frankfurt for two days, and Paris for a day to meet his prospects for a software export business. He obtained permission from the RBI after 15 days. When Ramani went to Frankfurt, the prospect he was to meet in Paris on the third day, changed the time of the meeting from 4 pm to 9 am.

Ramani went to Paris the second night itself to attend the third day meeting in Paris at 9 am. Ramani, ended up spending one night in Frankfurt, and two nights in Paris. Those days, we had to submit a report to RBI after every trip aboard about our utilisation of the hard currency released by the RBI.

When Ramani returned to Chennai, he submitted the report; he promptly got a show cause notice from the RBI Chennai, why Ramani had spent two nights in Paris and one night in Frankfurt, as against the RBI approval of one night in Paris and two nights in Frankfurt.

I served on the RBI Board 15 or 20 years ago. When I recounted this to my friend, Dr. Bimal Jalan, the then RBI Governor, he just could not stop laughing at this ludicrous behaviour of his officers.

When we applied for license to import a computer, the process took two to three years and anywhere between 30 and say 50 visits to Delhi. However, during this period, technology in the US advanced every six months, by the time we got our approval to import a computer, the disk drive manufacturers in the US had released a new version of disk drive with 50 percent more capacity at 30 percent lower price.

When I went to DoE (Department of Electronics) to update the model numbers in the license, I was advised by the officers against it due to the possible inordinate delay in obtaining the approval, I was adamant and of course I applied. It took us another 12 months to get the model numbers revised in the license. Those days technology progressed every six to nine months in the US, thanks to the Indian bureaucracy, India remained at least two generations behind and paid 30-40 percent more for an inferior product. This is the story.

Q. And if you look at what we are witnessing now, there's real momentum in the stock markets. There's so much excitement around these internet companies going public, Zomato, for example, is going public and then there is talk of Paytm, PolicyBazaar and Nykaa, but what was it like to raise capital and run a publicly listed company? You know, maybe pre and post liberalisation ’91 period?

A. Chandra, first of all my congratulations to these wonderful entrepreneurs. I salute them, I wish them even greatest successes. Let me talk about our days. We were the second software company to go public. My friend Ashank Desai’s Mastek, was the first one to go public in December 1992. We originally wanted to go public in 1991, 10 years after we founded the company. But we faced delays due to the assassination of Shri Rajiv Gandhi, the Babri Masjid fiasco and the Harshad Mehta scam.

The stock market did not know those days anything about the prospects for Indian software services companies in the export market, particularly in the US. However, we were prepared very well. Thanks to Nandan Nilekani, V. Balakrishnan and GR Naik and I, we had full projections for the first three years after the IPO for both the top line and the bottom line.

However, the quality of the red herring in India those days was very, very low. Most information in the red herring document was junk. There was not much information about future prospects of the company and the risks that the company face. There was no mechanism like the US-style roadshow, there were very few institutional investors in India. We did not have one-on-one meetings with knowledgeable institutional investors. We could not collect data for demand from investors. And we could not decide on the price at which we would go public on the last day of a 15-day period roadshow, like it happens in the US.

I must record here, but for the kindness, commitment and support Infosys received from ENAM founders Shri Vallabh Bhansali and Shri Nemish Shah, Infosys would not have reached where it has today. I remain ever grateful to these two kind people.

I am also glad that SEBI came into existence in 1992, and good global practices have been adopted from the developed world.

Q. What fundamentally changed for you as an entrepreneur after the reforms of 1991? What was the most visible change in the way Infosys could function, after the historic Budget on July 24, 1991?

A. It's an excellent question. Entrepreneurship is about converting an idea into value for customers, jobs for employees, wealth for investors, and of course entrepreneurs and finally, taxes for the government. Entrepreneurship flourishes in an environment of catalytic, encouragement and support from the government.

Till Shri Narasimha Rao, Dr. Manmohan Singh, Shri P. Chidambaram and Shri Montek Singh Ahluwalia waved the magic wand of reforms in July 1991, Infosys was constrained from using imagination to succeed in the marketplace. For this imagination to translate into action, we needed permission from the government for every little thing we wanted to do.

After the liberalisation, most of these hurdles were removed. Infosys was liberated to find its rightful place in the market. Decisions on opening sales and delivery offices, hiring talent from abroad, hiring quality, legal and brand consultant, and of course, investment bankers from abroad, going public in India and creating ESOPs in India, listing abroad to gain visibility of CFOs there. Creating ESOPs in hard currency using ADRs and raising funds for quality, productivity, technology, systems, and to build world-class campuses were taken in the boardroom without having to waste time in the corridors of North Block in New Delhi.

There was a new level of aspiration, confidence, determination, hope, enthusiasm and can-do spirit that simply had not existed in the company till then. Using these attributes, Infosys has become the leader in customer focus, employee welfare, and investor transparency through our initiatives in productivity, quality, finance, human resources, physical and technological infrastructure and branding. That is the reason why I have often said that Infosys is the best example of the early beneficiaries of liberalization.

Q. In terms of the impact of the reforms on wealth creation and expanding the middle class in India, there are so many legendary stories about people, drivers, employees who became millionaires, because of Infosys, you've spawned thousands of dollar millionaires, tens of thousands of rupee millionaires, would this impact have been possible, the outsized impact on wealth creation for the ordinary middle class without liberalisation?

A. In any country, there are two players in the creation of prosperity game, they are the government and the corporate. The government has to remove all restrictions and become just an impartial regulator. The Indian central government did most of it through the reforms in 1991 and successive governments have continued in that path.

The corporations on the other hand, must innovate, create competitive differentiation, gain bigger market share, raise revenues and profits, pay employees well, reward investors handsomely and pay more and more taxes. This is the game played in most developed nations as you know very well.

Infosys instituted an employee stock option plan with two components in 1994. Thanks to the reform. The chairman's plan was performance-oriented, and it rewarded the best performing employees, from the best peon to the best non-founder executive director. Of course, the founders were not eligible for any of these, as you know.

The HRD Directors plan was on the other hand, to reward loyalty and was based on the longevity of an employee in the organization. The recipients of Chairman's ESOP plan, received obviously much higher number of stock options than the ... What was unique about the Infosys ESOP was that we followed the words of Mahatma Gandhi that, every decision should be taken keeping in mind the betterment of the poorest employee.

Several peons, who have probably kept their shares or worth at least 10 to 15 crores. My colleague, Kris Gopalakrishnan ensured that every employee who was not part of the 1994 and 1998 ESOPs had at least 10 shares in the company as late as 2008, when he was the CEO. As of date, Infosys has given away 19 percent of outstanding equity, amounting to Rs 1.3 lakh crore today, to its non-founder employees.

Now, employees have paid significant capital gains tax to the government, they have built houses, they have bought swanky cars, have sent their children abroad for higher studies, gone on comfortable family vacations, and contributed to social causes. In other words, such policies have been a win-win-win for the employee, the corporation and the government. This exercise in democratization of wealth could not have happened without a reformist mindset in the government.

The government showed its willingness to extend the hand of cooperation in this exercise, it has done its job. However, the industry has not grasped this hand enthusiastically. Infosys has remained a loner in creating a large plan for the democratization of wealth. The corporate sector, of course, has given huge compensation to its senior management. But they have not shown the same level of generosity towards the bottom of the pyramid in corporate hierarchy.

Q. What according to you are the next wave of reforms or game-changing policy measures that can galvanise India towards its vision of becoming a $5 trillion economy? How can we build on the momentum that we are seeing in the technology and internet economy?

A. There are many areas which need reforms. Let me speak about a few.

First, despite the large population in the country, the number of people with employable skills are few, whether it is programmers, engineers, scientists, doctors, factory workers, or artisans. This is because our education system has not focused on using classroom learning to solve real world problems. The need of the day is to invite top universities, secondary schools, skill-based schools like the nursing school and vocational institutions from the developed world to establish their operations here in India, to train teachers in these areas in large numbers. That's the first thing we have to do.

Second, we have to bring back our focus on English. Books, journals, and even Wikipedia entries in English, as you know, are much larger in number than in any other language. Whether we like it or not, the only official link language for the college-educated people in India is English. I know several youngsters here in Bangalore, who have completed their degrees in vernacular, but were forced to take up jobs at a much lower level than they deserve, due to their inability to speak English reasonably fluently.

Mobility of labor at higher level is possible, only if we focus on improving our English. Our exports in general and our software exports in particular will suffer hugely if we abandon this precious thing called English. It is time that we accepted English as an Indian language and encourage it as any other Indian language.

Third, we have to introduce flexibility in hiring and letting go employees, if we want accelerated growth. This theory is proven and I don't need any lengthy discussion on this. What we need to do, Chandra, is to create a safety net fund for the retrenched employees so that they can get an acceptable allowance for a reasonable period when searching their next job.

The fourth and a very important thing that we need to do is to create incentives for states to perform better. For example, in China, the governors of provinces used to have just two key performance indicators, at least till 2006, when I discussed this issue with them. They were incremental annual growth in exports in US dollars, and second jobs created in millions.

Q. Finally, Mr. Murthy, I just wanted to ask you any words of advice that you have, for new-age entrepreneurs who are steering India through the next level of growth, the face of the capital markets is going to change significantly. IT companies such as yours were one of the biggest engines of wealth creation. But perhaps the next decade, will be dominated by some of these internet companies. So as they get ready to become a public company, what would your words of advice be, as someone who has successfully taken a company public?

A. An entrepreneur needs to have two important attributes. First is competence, and second, are values. That's why at Infosys, I adopted the tagline 'Powered by Intellect, Driven by Values'. So my request to all these wonderful entrepreneurs is to recruit more and more people who have these two attributes to run their companies with the best level of corporate governance and to contribute to the society in a very meaningful way.

I mean, they're all very advanced people. They know much more than I do, I'm an old man, my days were the 80s and 90s. So therefore, I don't think I can tell them much. I pray for their success, I salute them, I wish them even bigger success. But they are the builders of modern India. The nation's hopes and dreams rests on their shoulders. And I am confident that they will take this country to a much higher level than we did. That's what I would say.

Q. That's a wonderful message Mr. Murthy. So have you started traveling, are you still staying at home?

A. I took both the doses of [COVID-19] vaccination. And it's now almost more than three months after the second dose. So I have started coming to the office even though I don't meet anybody, even my secretary interacts with me, keeping in mind social distance and masks and all of that. So, in a sense, I am quarantined. It is getting to be very disconcerting, but then, as citizens of this country, we have to do whatever is in the best interest of the nation. So we are all doing that.

CHANDRA R SRIKANTH is Editor- Tech, Startups, and New Economy
This article was originally published on Moneycontrol on July 21, 2021.