INFOSYS: Blowing Hot Blowing Cold

Infosys was shaken by an internal controversy which led to its shares crashing 16% to ₹643.30 and wiping out ₹53,452 crores from its market capitalisation. Is India’s iconic company still challenged with governance issues?

Background

Considered a vanguard of India’s software industry, Infosys was shaken by an internal controversy which led to its shares crashing 16% to ₹643.30 and wiping out ₹53,452 crore from its market capitalisation.

This was consequent to an announcement that the company was investigating whistle-blower allegations that its CEO Salil Parekh was involved in  “unethical practices”, with the intention to, “boost short-term revenue and profits”. They have also accused CFO Nilanjan Roy for being compliant in the matter. They claim to have in their possession, e-mails and voice-recordings to support the allegations; though, little evidence has been made available in the public domain, so far.

This was indeed not good news for the Indian market already stressed by downfall in all indices.

In an effort in damage control, Nandan Nilakani, Chairman of the Infosys Board of Directors, assured that complaints had been placed before the Audit Committee and the non-executive board members and both the CEO and the CFO had been recused from the proceedings. Further, an independent law firm Shardul Amarchand Mangaldas had been retained to conduct an independent investigation. 

More worryingly, this is likely to have wider implications as US media reported that the Rosen Law Firm, New York was preparing for a class-action lawsuit, to recover alleged losses suffered by Infosys investors in the US.

Founded in 1981, Infosys is considered, the pioneer of India’s Info Tech boom. Launched by seven engineers, it has grown to a US$ 11.8 billion enterprise, with more than 2,28,000 employees. It is Asia’s second most valued Info Tech services firm, after Tata Consulting Services (TCS).

Analysis

This is the second time Infosys is coming under a cloud- in 2017, there was a similar crisis agains instigated by whistle-blower complaints. At that time, the internal upheaval forced a board reshuffle and the resignation of the then CEO, Vishal Sikka. At the time of his stepping down, Sikka blamed differences between the Board and co-founders led by Narayana Murthy that made his job untenable.

It is a known fact, that since 2014, Narayana Murthy had been engaged in a standoff with the board over poor governance, including lack of transparency and excessive payments to some senior management. After the reshuffle of the board, Nandan Nilakani took over as the President and was entrusted with the responsibility of hiring the new CEO and CFO- Salil Parekh and Nilanjan Roy respectively. Things some to have been going well for the company and one month back, Infosys was named the third-best regarded company in the world by Forbes- after Visa and Ferrari.

Assessment

  • Infosys, annual results were audited by independent chartered accountants, Deloitte Haskin & Sells LLP, in April. It should be unlikely that respected and professional auditors of such stature, would have missed reporting a serious over-valuation. Until more evidence is released by the whistle-blowers, it may be difficult to comprehend the breach of law if any.
  • If proved correct, Infosys which is listed in US stock market may face serious litigations, with law firms waiting for just such an opportunity.  Rosen Law Firm, New York is reported to be already preparing for class action suit against Infosys.  The filing of the actual suit will be a clear indication on the seriousness of the allegations.
  • US market regulator SEC  has also requested Indian Sebi to share its findings for necessary action on its part. Therefore Infosys will face action not only in India but also in its most lucrative market US where till date it has enjoyed a good reputation.
  • Both the CEO and CFO are relatively new, having completed 19 and seven months in office, respectively. They were both selected on merit and it is difficult to perceive that they would have developed a personal interest in inflating results, so early in their innings with Infosys.  
  • More likely, if there were shortcomings, it could have stemmed from the earlier malaise of lack of transparency, which Narayana Murthy, the Grand Old Man of Infosys, had repeatedly pointed out. It would indeed be a sad day, if India’s iconic software company, were to be found wanting in the matter of ethics.

Image Courtesy: businessline

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