8 April, 2004

Infosys Technologies Ltd.

India

Analyst:
Dan Konigsburg London Tel. +44 (0) 20 826 3814 Email: Dan_Konigsburg@ standardandpoors.com Revathy Sreedharan Bangalore Tel. +91 80 558 0899

Overall Company Score (CGS) Sovereign Credit Rating*

Component Scores: Ownership structure and external influence Shareholder rights and stakeholder relations Transparency, disclosure & audit Board structure and effectiveness

CGS8.6 (maximum CGS10) BB/Stable/B

9.0 (maximum 10) 8.3 (maximum 10) 9.2 (maximum 10) 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 companys governance policies are more robust than those promoted by Indias 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

*For important information on Corporate Governance Scores, including Country Factors, please see the last page of this report.

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 & Poors 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 companys 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 companys compliance with the U.S. SECs 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 Score9.0 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

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

Assessment
Positive Positive

Infosys shares are widely held and its shareholding structure is transparent. In addition to disclosing shareholdings by category, the companys 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

There is a strict separation of management control and ownership control among the 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.

Assessment
Positive Neutral

Standard & Poors 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 & Poors Corporate Governance Score Infosys Technologies Ltd.

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 Foreign Institutional Investors Overseas Corporate Bodies and Non Resident Indians Founders and their families Mutual funds, banks and Financial Institutions Shares underlying ADS *
* Held by beneficial owners outside India

Number Of shareholders 337 734 23 191 1

Voting power (%) 42.32 0.70 26.62 6.12 7.87

Number of shares held (million) 28.13 0.50 17.69 4.06 5.23

Name N. R. Narayana Murthy and Family Nandan M. Nilekani Emerging Markets Growth Fund Inc. Merrill Lynch Capital Markets Espana SA SVB Directors and Officers as a Group
Source: Inofsys Technologies Ltd., as of 31 December, 2003

Number Of shares (millions) 4.46 3.09 3.70 2.48 14.94

Percent of class 6.70 4.67 5.56 3.73 22.48

Despite this, there is positive influence from the founders collectively, on everything from the companys 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 companys (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 Poors assesses as positive the recent amendment to the companys Articles that removed protection for Mr. Murthys position as CEO (managing director) providing he held at least five percent of the companys equity

8 April, 2004 www.standardandpoors.com

Component 2: Shareholder Rights and Stakeholder Relations

Component Score8.3 2.1 Shareholder Meeting & Voting Procedures
Infosyss commitment to shareholder democracy is strong. The company supplies comprehensive information to shareholders well in advance of company meetings. The companys website is accessible and informative.

Key Analytical Issues

The company informs shareholders of upcoming meetings sufficiently in advance (at least 21 days notice) to consider and execute their votes. There is evidence of attempts to ensure that notice reaches beneficial shareholders before shareholder meetings. Information sent to shareholders on the agenda for the meeting is generally comprehensive.. The company posts agendas and details of shareholder meetings on its website Shareholders meetings are usually held in Bangalore, the companys city of incorporation. The 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 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, 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 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.

Assessment
Positive Positive Positive Positive Positive Positive

Negative.

Positive

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 & Poors Corporate Governance Score Infosys Technologies Ltd.

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 companys shares.

Key Analytical Issues

Ownership rights are secured via a transparent and independent registrar system; ADRs are in are administered by a reputable depository bank. Share structure consists of only common shares and there are no classes of common shares. There is a provision for issuance of preference shares in the companys charter, but it has not been used. Charter clearly establishes a one share, one vote standard. The company has a clearly articulated dividend policy and declared dividend payments have been made. There are no super majority requirements that interfere with shareholders right to elect directors and ratify corporate actions. There are no explicit anti-takeover provisions in the companys Articles. The company has removed from its Articles protections regarding Mr. Murthys position that may have been invoked during a takeover.

Assessment
Positive Positive

Positive Positive Positive Positive

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 companys 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 companys 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 companys 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 companys 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 companys 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 Indias 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 companys nationality.

8 April, 2004 www.standardandpoors.com

2.3 Stakeholder Relations

Relations with stakeholders appears to be moderately strong.

Key Analytical Issues

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

Assessment
Positive Positive

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 Score9.2 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

Financial statements are produced and audited according to Indian Accounting Standards as well 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 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 reason to suspect transfer pricing, or hidden transfers. Financial reporting is assessed as very strong. Memorandum and Articles of Association are available on-line. The company has decided not to expense options until consensus is reached among regulators and competitors in its industry.

Assessment
Positive

Positive

Positive Positive Negative

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 companys and the industrys 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 & Poors Corporate Governance Score Infosys Technologies Ltd.

companys 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 & Poors 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 companys 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

Public reports are always filed on time and information is sent to shareholders in a timely manner. Infosys makes substantial effort to ensure that reports and announcements reach a significant 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. Publicly filed financial statements and reports are sent to shareholders in the form of quarterly and annual communications. In addition, the companys 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. Other documents, including the company charter, and By-laws, are available on-line.

Assessment
Positive Positive

Positive Positive

Positive

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

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 SECs 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

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

Assessment
Positive Positive Positive Positive Neutral

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 & Poors 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 & Poors 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 & Poors Corporate Governance Score Infosys Technologies Ltd.

auditors, the external auditors and company management. At this forum, managements response to each of the auditors 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 & Poors 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 & Poors 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 Score8.0 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 boards behind-the-scenes work.

Key Analytical Issues

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

Assessment
Positive Neutral Positive Positive 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 companys 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 Full Board Audit Committee Compensation Committee Nomination Committee
Investors Grievance Committee

Non-executive (Affiliated) 0 0 0 0

Non-executive (Independent) 8 6 4 5

7 0 0 0

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 & Poors with this Corporate Governance Score. The board is relatively large compared to other global companies, reflecting the companys 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

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 longserving board members. There is a clear interest in increasing board effectiveness and this was reflected in Standard & Poors meetings with directors. This is not an overly formal board discussions are candid, open and uninhibited.

Key Analytical Issues

The Board has articulated for itself a set of matters reserved for its decision. Directors are expected to perform a variety of roles, and there is clear thought given to how nonexecutives participate on this board. There is clearly defined leadership defined for the non-executive directors.. The board appears to have settled some debate over issues relating to board functioning and board role. The director selection process includes explicit consideration of independence. The process 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 the independent audit committee and the outside auditors. Interviews, a review of board minutes, and a review of the number of other board memberships 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. The non-executives have taken pro-active steps to ensure their independence from management. Non-executives complete annual self-evaluations and, as part of the process, provide a review of 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. Relationships that external directors have with the company are limited.

Assessment
Positive Positive Positive Positive Positive

Positive Negative

Neutral Positive Positive Negative 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 & Poors met with all but four of the directors (and all but one of the nonexecutives), 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 & Poors Corporate Governance Score Infosys Technologies Ltd.

10

mentor in 2001 emphasizes his interest in maintaining the companys 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 & Poors 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 companys 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 companys 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 managements 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

Compensation for executives and senior management is both cash and share based. Executive pay is generally aligned with shareholders interests.. Compensation policy is based on egalitarian principles and there is less concentration of stock option awards to senior executives than at competitor companies.. The boards Compensation Committee makes decisions on compensation issues and is highly independent. Company founders have consistently declined stock option grants (even before the practice was 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 increases in performance. Compensation for non-executives has increased recently, making it among the highest in India, and more competitive on a global level.

Assessment
Positive Positive Positive Positive

Negative Positive

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 lowestpaid 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 companys collegial working environment and aggressive culture continues to attract large numbers of applicants. This modesty has not, however, dampened the companys 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 postgrant 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 cynics 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 boards 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 companys global ambitions. High nonexecutive fees, however, risk objections from domestic shareholders, and they may uncomfortably exceed the combined salary and bonus of many senior executives.

Standard & Poors Corporate Governance Score Infosys Technologies Ltd.

12

Corporate Governance Scores

Corporate Governance Score (CGS) reflects Standard & Poors assessment of a companys corporate governance practices and policies and the extent to which these serve the interests of the companys financial stakeholders, with an emphasis on shareholders interests. These governance practices and policies are measured against Standard & Poors 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 & Poors, 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 9a company that, in Standard & Poors opinion, has very strong corporate governance processes and practices overall. A company in these scoring categories has, in Standard & Poors opinion, few weaknesses in any of the major areas of governance analysis. CGS 8 and CGS 7a company that, in Standard & Poors opinion, has strong corporate governance processes and practices overall. A company in these scoring categories has, in Standard & Poors opinion, some weaknesses in certain of the major areas of governance analysis. CGS 6 and CGS 5a company that, in Standard & Poors opinion, has moderate corporate governance processes and practices overall. A company in these scoring categories has, in Standard & Poors opinion, weaknesses in several of the major areas of governance analysis. CGS 4 and CGS 3a company that, in Standard & Poors opinion, has weak corporate governance processes and practices overall. A company in these scoring categories has, in Standard & Poors opinion, significant weaknesses in a number of the major areas of governance analysis. CGS 2 and CGS 1a company that, in Standard & Poors opinion, has very weak corporate governance processes and practices overall. A company in these scoring categories has, in Standard & Poors 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 & Poors publishes country governance analyses from time to time, it is important to note that Standard & Poors does not currently score individual countries. However, consideration of a countrys 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 companys 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 & Poors 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 & Poors by the company, its officers and any other sources Standard & Poors considers reliable. A CGS is neither an audit nor a forensic investigation of governance practices. Standard & Poors 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.

Published by Standard & Poors, a Division of The McGraw-Hill Companies, Inc. Executive offices: 1221 Avenue of the Americas, New York, NY 10020. Editorial offices: 55 Water Street, New York, NY 10041. Subscriber services: (1) 212-438-7280. Copyright 2004 by The McGraw-Hill Companies, Inc. Reproduction in whole or in part prohibited except by permission. All rights reserved. Information has been obtained by Standard & Poors from sources believed to be reliable. However, because of the possibility of human or mechanical error by our sources, Standard & Poors or others, Standard & Poors does not guarantee the accuracy, adequacy, or completeness of any information and is not responsible for any errors or omissions or the result obtained from the use of such information. Ratings are statements of opinion, not statements of fact or recommendations to buy, hold, or sell any securities. Standard & Poors uses billing and contact data collected from subscribers for billing and order fulfillment purposes, and occasionally to inform subscribers about products or services from Standard & Poors and our parent, The McGraw-Hill Companies, that may be of interest to them. All subscriber billing and contact data collected is processed in the U.S. If you would prefer not to have your information used as outlined in this notice, or if you wish to review your information for accuracy, or for more information on our privacy practices, please call us at (1) 212-438-7280. For more information about The McGraw-Hill Companies Privacy Policy please visit www.mcgraw-hill.com/privacy.html. Standard & Poor's receives compensation for rating obligations and other analytic activities. The fees generally vary from US $5,000 to over US$1,500,000. While Standard & Poor's reserves the right to disseminate the rating it receives no payment for doing so, except for subscriptions to its publications. The Standard & Poor's ratings and other analytic services are performed as entirely separate activities in order to preserve the independence and objectivity of each analytic process. Each analytic service, including ratings, may be based on information that is not available to other analytic areas.