MphasiS Ltd reported an 8% sequential decline in revenue and a fall of as much as 20% in net profit for the quarter ended January. MphasiS shares fell by 28% in a single trading session.

Just three months ago on an earnings call, the company’s CEO Ganesh Ayyar had said, “Even though HP (Hewlett-Packard Co.) does offer and continues to offer large opportunity for us…increasing client concentration at some stages can also be counterproductive."

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HP owns 60.5% in MphasiS and contributes around 70% to the company’s revenue. After the firm offered another round of price cuts to HP last quarter, Ayyar’s prophetic-sounding statement seems to have come true sooner than anyone had anticipated.

According to the company, the price cuts were just one of the various factors that led to a weak financial performance last quarter. But analysts are buying none of it. They are also concerned about the drop in disclosure standards. The company has stopped reporting some details such as average billing rates.

Besides, one of the reasons it gave for the large drop in revenue was that the preceding quarter included one-off revenue of $9 million (Rs 40.5 crore). Oddly enough, MphasiS hadn’t disclosed this at the time.

In short, putting two and two together, analysts say that HP is misusing its position as the dominant shareholder and largest customer by driving down prices offered to MphasiS. Worse, the latest price cuts come on the back of sharp cuts in the previous year.

Some analysts claim that HP is deliberately eroding shareholder value at MphasiS, so that it can buy out minority shareholders cheaply when it decides to take the company private.

They point to a similar approach employed by HP with subsidiary company Digital Globalsoft Ltd in 2003. About six months before HP made an open offer to buy out minority shareholders of Digital Globalsoft, HP had announced a scheme to merge its captive software services business called HP-ISO (India Software Operations) with that of Digital.

The merger ratio was blatantly in favour of HP-ISO, and this had led to a fall of 26% in Digital Globalsoft’s share price in a single day’s trading. Until the time the company announced the open offer, Digital’s shares underperformed its peers (CNX IT index) by 25%.

If that is indeed the case, what are MphasiS’ minority shareholders’ options? At first glance, the issue seems to be one of transfer pricing, which comes under the income-tax department. If the tax department is fine with the billing rates offered by HP to MphasiS, the foul-play argument described above wouldn’t hold.

Shareholders could also approach the Company Law Board (CLB). Chartered accountant Jayant Thakur says, “If it’s perceived that there is misgovernance and repeated oppression of minority shareholders, under section 397 of the Companies Act, 1956, 10% of shareholders can get together and file a petition with the Company Law Board. This, of course, has to be proved by facts, and if it is established that there is indeed such misgovernance, then CLB may grant relief."

But then, the experience of MphasiS’ minority shareholders is rather different from “repeated oppression". HP took over control of MphasiS in 2008 as a result of its acquisition of Electronic Data Systems Corp. (EDS).

In its first full fiscal under the new owner, that is, in the year ended October 2009, MphasiS reported a 43% increase in revenue and 121% jump in net profit, at a time when the industry was growing at around 15%. This was only because of a sharp rise in the business offered by H-P.

This outperformance was also reflected in the company’s shares. Since the time HP announced the acquisition of EDS, MphasiS shares have outperformed the CNX IT index by as much as 85%. Of course, the sharp fall on Friday has taken off some of the sheen.

All told, MphasiS’ minority shareholders have had a mixed experience under HP. While it seems that HP is eroding the company’s value now, it can’t be denied that it added to its value soon after the acquisition.