If you’ve been glancing at the quarterly results of India’s corporate giants, especially the IT heavyweights like TCS, Infosys, or banking majors like HDFC Bank, you might have noticed one thing in common.
Profitability took a nosedive this quarter.
TCS, Infosys, HCLTech, Wipro, Tech Mahindra and LTIMindtree, took a cumulative hit of ~₹5,000 crore in the Q3FY26. Across the board, Corporate India has wiped thousands of crores off their bottom line in a single quarter. In a normal world, this would trigger a sell-off. Panic buttons would be smashed. Red candles would cover the charts.
Markets fell, but mostly due to macro-economic geopolitical factors rather than anything fundamental.
Why are investors shrugging off thousands of crores in lost profits? To understand that, we need to look at the massive shift that just happened in India’s labour laws and why it’s actually a ‘good’ kind of bad news.
The Big Shift: What Just Happened?
For years, India’s labour laws were a ‘khichdi’ of 29 different central laws, some dating back to the colonial era. They were complex and a compliance nightmare.
The government finally made life simpler. They consolidated these 29 laws into just 4 Labour Codes:
- Code on Wages
- Code on Social Security
- Industrial Relations Code
- Occupational Safety, Health and Working Conditions Code
The goal was simple: Modernize the laws, make compliance easier for companies, and crucially, ensure universal social security for every worker. But there was one specific rule in the Code on Wages that caused the financial explosion we saw this quarter.
The ‘50% Basic Rule’: The Game Changer
Indian companies typically gave lower amounts as basic pay to their employees as part of their salary structure.
Let’s say you were hired at a salary (CTC) of ₹1 Lakh per month. The company wouldn’t just give you ₹1 Lakh. They would split it up:
Basic Salary: ₹30,000 (kept artificially low)
HRA, Special Allowances, Conveyance, etc.: ₹70,000
Why? Because the company’s contribution to your Provident Fund (PF) and Gratuity is calculated only on the Basic Salary. By keeping the Basic low, companies saved money on these contributions.
The New Rule:
The new Labour Code mandates that Basic Salary must be at least 50% of the total CTC.
If your Basic is less than 50%, the government will force the company to calculate PF and Gratuity as if it were 50%.
The ‘Profit Crash’: Why Did Companies Take a Hit?
This is the most interesting part. If the law just says “pay more PF from next month,” that’s a small recurring cost. Why did profits drop by thousands of crores in one single shot?
The answer lies in ‘Past Service Liability.’
Think about Gratuity. It is a promise the company makes: “When you leave, we will pay you 15 days of salary for every year you worked here.”
But that payment is based on your last drawn Basic Salary.
When the new law forced the Basic Salary up (to 50% of CTC), it didn’t just apply to future years. It meant that all the years an employee has already worked are now suddenly valued at this higher salary rate.
Example:
- Old World: Employee X worked for 10 years. The company owed them gratuity based on a ₹30k Basic salary. The company had set aside money (provisioned) for this.
- New World: Suddenly, the law says the Basic salary is now ₹50k.
- The Hit: The company now realizes, “Oh no, we owe Employee X gratuity on ₹50k, not ₹30k! And we owe it for the last 10 years!”
They have to instantly ‘top up’ that provision fund. That massive top-up is the one-time hit you saw in the quarterly results. It’s an accounting catch-up for years of low-base salary structures.
Why Are Investors Ignoring It?
If a company loses ₹2,000 crore, stock prices usually tumble. Here’s why they didn’t:
- Operating Performance Intact: Investors are more bothered about the continuing operating performance of companies – how is the revenue growing, competition, etc.
- It’s ‘Non-Cash’: The company didn’t actually write a cheque for ₹2,000 crore yesterday. They just moved money from ‘Profits’ to a ‘Liability Fund’ on the balance sheet. The cash is still inside the company; it’s just earmarked for future payouts.
- It’s a ‘One-Off’: This is a one-time clean-up. Next quarter, this expense won’t be there. Investors care about future earning power, and that remains intact.
Conclusion
The ‘profit drop’ was essentially an accounting adjustment, a necessary correction to align with the new reality of Indian labour laws.
Companies will likely restructure compensation structures during their next appraisal cycle (for eg. reduce Fixed CTC and add a component of variable bonus) in a way that their liabilities towards cost items like Provident Fund, Gratuity and Leave Encashment remain contained.
As an investor, the biggest takeaway is that one should not react too much to such one-time non-operational items and look at the bigger picture.
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Till the next time,
Vijay
CEO – InCred Money
