Infosys shares plummeted16% on Tuesday, their worst single-day drop in over six years, after it emerged that anonymous whistleblowers had sent a letter alleging “unethical practices” by its top executives to increase short-term revenue and profits.
While Monday was a stock market holiday due to state assembly elections, the company’s shares plunged as much as 16% to Rs 645.35 on the BSE at 12.20 pm IST on Tuesday. Here’s everything you need to know about the controversy.
What the letter said
The complaints were sent to the board of Infosys and the US Securities and Exchange Commission (SEC) by a group of employees who call themselves ‘ethical employees’, according to reports. In the letter dated 20 September, seen by The Economic Times, the group alleged that CEO Salil Parekh was bypassing reviews and approvals for large deals.
“He (Parekh) directs them to make wrong assumptions to show margins. CFO is compliant and he prevents us from showing in board presentations large deal issues… Several billion-dollar deals of last few quarters have nil margin,” the letter states, according to The Economic Times.
The group also said that Parekh allegedly referred to independent directors D Sundaram and DN Prahlad as “Madrasis”, according to IANS. Parekh, the letter states, referred to Biocon chairperson Kiran Mazumdar-Shaw, a lead independent director on the 10-member Infosys board, as a “diva”, the report added.
“In the last quarter (July-September), we were asked not to fully recognise costs like visa costs to improve profits. We have voice recordings of these conversations,” IANS quoted the employees as saying in the letter.
The whistleblowers also alleged that things are not done according to accounting standards in large contracts such as those with Verizon and Intel.
What Infosys said
A statement, attributable to Infosys chairman Nandan Nilekani, said that a board member received two complaints — one dated 20 September and the other undated.
The company said it has placed the complaints before the audit committee on 10 October and before the non-executive members of the Board on 11 October, in accordance with their whistleblowers policy.
The complaints are being dealt with in an objective manner, with the CEO and Chief Financial Officer Nilanjan Roy recused from the matter, it added.
The undated complaint, the statement said, largely deals with allegations relating to the CEO’s international travel to the US and Mumbai.
The audit committee has retained the law firm of Shardul Amarchand Mangaldas & Co. to conduct an independent investigation, and the company’s board will take appropriate steps based on the outcome of the investigation, the company said.
Shareholders, analysts worried
Harit Shah, research analyst at Reliance Securities, told Livemint that this is a very serious news. This equates to a corporate governance issue, Shah said. “Deputy CFO has also quit. This in itself is an indirect admission that something is rotten.”
“While we await developments on the board investigation, given that it is so widely held, it is very likely that some investors will vote with their feet and sell at least some of their holdings,” Livemint quoted Shah as saying. Reliance Securities has a hold rating on Infosys.
Shah was also quoted by The Hindu as saying that the market is “very unforgiving of companies that have corporate governance issues”. While it would not be fair to directly jump to conclusions, he said, this issue appears “quite ugly”.
The allegations “could severely damage the company’s pristine brand if true, especially in the IT services industry,” Bloomberg Intelligence analyst Anurag Rana wrote. “It could also hurt short-term sales, as clients may look for other providers for newer projects.”
“We will know only when the investigation happens. If there is some truth in the complaint, then it will weaken the entire IT sector. It’s a glass half-full and half-empty kind of situation right now,” Sanjiv Bhasin of IIFL told The Economic Times. The market, he added, is also in a mode where people have taken advantage of capitulation and rumour mongering. “We have seen that in the case of DHFL and Indiabulls.”
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(With PTI and Reuters inputs)