Enterprise Risk Management in Wipro's Software Services Division

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Regulatory Risks

The Finance Act, 2000 had phased out the ten-year tax holiday over a ten-year period from the financial year 1999-2000 to financial year 2008-2009. Wipro's tax holidays would expire in stages by 2009. Finance Act, 2002 subjected 10% of all income derived from services located in "Software Technology Parks" to income tax for the year ending March 31, 2003. When the tax holiday and income tax deduction exemptions expired, Wipro's costs would increase. The government of India might also enact similar laws in the future, which could further impair other tax incentives.

Indian laws imposed various restrictions on raising capital outside India through the issuance of equity or convertible debt securities. Generally, any foreign investment in an Indian company required approval from relevant government authorities in India. However, the government currently did not require prior approvals for IT companies, subject to certain exceptions.

The Government of India had recently issued a policy statement permitting acquisitions of companies organized outside India with a transaction value: § if in cash, effective April 28, 2001 up to 100% of the proceeds from an ADS offering; and
§ if in stock, the greater of $100 million or ten times the acquiring company's previous fiscal year's export earnings.
§ in addition, upto US $100 million could be invested under the automatic approval route.

These amounts were quite small in a global context and major investments would continue to have discretionary approvals.

Indian law imposed foreign investment restrictions that limited a holder's ability to convert equity shares into ADSs. This might cause equity shares to trade at a discount or premium to the market price of Wipro's ADSs. Recently, however, the government had permitted two-way fungibility of ADRs, subject however to sectoral caps and certain conditions.

Legal & Contractual risks

Many of Wipro's contracts involved projects that were mission critical to its clients. Any failure in a client's system could result in a claim for substantial damages, regardless of Wipro's responsibility for such failures. Wipro attempted to limit its contractual liability for damages resulting from negligent acts, errors, mistakes or omissions in rendering its services. But the company could not always be sure that the limitations on liability it provided for in its service contracts would be enforceable in all cases, or would protect it adequately from liability for damages.

Intellectual property rights were important in Wipro's business. Wipro relied on a combination of copyright and trademark laws, trade secrets, confidentiality procedures and contractual provisions to protect its intellectual property. However, Indian laws did not protect proprietary rights to the same extent as laws in the US. Therefore, unauthorized parties might infringe upon or misappropriate Wipro's products, services or proprietary information. Wipro might need to litigate to enforce its intellectual property rights or to determine the validity and scope of the proprietary rights of others.

If Wipro became liable to third parties for infringing their intellectual property rights, it might have to pay substantial damages and might be forced to develop non-infringing technology, or cease selling the applications or products that contained the infringing technology. Wipro might be unable to develop non-infringing technology or to obtain a license on commercially reasonable terms.

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