In Infosys' game of chess, board's buyback offer has all but checkmated Murthy

N. R. Narayana Murthy, founder and chairman of Infosys, listens to a question during an interview with Reuters at the company's office in Bangalore February 28, 2012. Picture taken on February 28, 2012. REUTERS/Vivek Prakash (REUTERS - Tags: BUSINESS SCIENCE TECHNOLOGY PROFILE HEADSHOT) - RTR30CV2

In chess, a discovered check is a lethal and combative strike which occurs when one piece moves out of the way of the other which then threatens the king. The piece that has moved has independently threatened another piece. The move succeeds because the opponent is unable to meet the two threats at one time and his priority is to save the king. In the end, there is serious material damage to the opponent.

A similar game of chess is being played between the board members of Infosys and the promoters of the company. The resignation by Chief Executive Officer Vishal Sikka and a buyback offer by the board the day after is a discovered check on the promoters led by Narayana Murthy.

The founders have been advocating a buyback over the last few years. Not only was the cash pile tempting for the founders, but also the fear that the board might utilise it for some over-priced acquisition. Murthy and team have been accusing the board of the opaque manner in which Infosys acquired Israeli software company Panaya.

Rather than making another costly acquisition, the promoters felt that the company should reward the shareholders (including the promoters) by issuing a buyback of shares which would reduce the pile of cash.

Infosys announced a generous buyback offer of Rs 13,000 crore at Rs 1,150 per share which is now at over 30 percent premium to the market price.

Before the announcement of the buyback, Sikka submitted his resignation and the board blamed Murthy’s continuous assault as the reason for Sikka’s resignation.

Murthy for his part has issued a letter reiterating his reasons for pestering the board, saying he has no issue with Sikka but with the board. The manner and tone in which the two recent letters from both the factions have been written suggests almost no room for compromise.

It is in this regard that the buyback and resignation is the "discovered check" on Murthy and his team. The action of the promoters with regards to the buyback will be closely watched.

If they submit their shares in the buyback and reduce their stake despite Sikka’s exit, their stand of fighting for the long-term good of Infosys would sound hollow. The promoters would be making money by selling their stake at a huge premium over the current market price. This is unlikely to go down well with investors as many blame Murthy for Sikka’s exit and the resultant fall in Infosys’ share price. Why should the promoters sell their share at a time when Sikka is no longer at the helm? The promoters need to put their money where their mouth was.

The other aspect of the discovered check is that in case the promoters do not submit their shares in the buyback offer, their stake in the company would increase as the shares bought back by the company is extinguished and share capital reduces. Higher promoter stake would be interpreted as higher meddling in the affairs of the company, something that would mean that the status quo would continue and no real decisive policy measures would be taken.

Either move is going to hit the reputation and wealth of Murthy and his team. Murthy has been asking for changing representation on the board of directors of the company. While Sikka could not take the pressure from outside, it is to be seen how the other board members respond in the days ahead.

Irrespective of how events unfold, the sharp selling on huge volume in the Infosys counter reflects on which side the investors have voted. A bigger worry is that in this game of chess, the two factions are heading for an endgame which will be detrimental to the company, its employees, and its shareholders.