Infosys investors upset, but give company benefit of doubt

Infosys shares have taken a beating following a whistleblower complaint against its top executives and its investors are worried but are willing to wait and watch.

Vinay CS, an investor and a partner in a Bengaluru-based chartered accountant firm, said: "The news was indeed shocking but we want to hear from the management."

Infosys' audit committee was looking into the complaints and CEO Salil Parekh and CFO Nilanjan Roy had recused from the matter, Infosys chairman Nandan Nilekani said in a statement on October 22.

In the morning trade, Infosys tanked 16 percent, its biggest fall in six years. It was down 14.3 percent and was quoting at Rs 657.90 on the BSE at 1247 hours. A day earlier, a market holiday in India, Infosys shares plunged 14 percent at the New York Stock Exchange.

The fact that it was the media and not Infosys that first reported the complaints would increase the scrutiny on the company, said Shriram Subramanian, the Founder and MD of InGovern Research Services.

A group of staffers, who call themselves “ethical employees”, wrote a letter, dated September 20, to the Infosys Board and also to the US Securities and Exchanges Commission on October 3, alleging Parekh and Roy followed unethical practices to boost short-term revenue and profits, media reports said.

Moneycontrol has not been able to review the letters.

“The Audit Committee has now retained the law firm of Shardul Amarchand Mangaldas & Co. (October 21, 2019), to conduct an independent investigation. The board, in consultation with the Audit Committee, will take such steps as may be appropriate based on the outcome of the investigation. Our statutory auditors, Deloitte, India have also been completely updated on this matter post the Board meeting of October 11, 2019,” Nilekani’s statement added.

What could have caused this? Increased pressure to get back to its leader position, said some analysts.

When Parekh took over, there was a huge pressure to perform following Vishal Sikka's exit. The company has been doing well, the last two quarters have beaten analyst’s expectations. The complaints, however, could put a question mark on the company’s performance.

It is a double blow for investors, who had just begun to repose faith in the software giant after the nightmare of Panaya and Skava acquisitions.

One of the key concerns for investors were ESOPs for Parekh, that was approved by the management in June.

Close to 21.61 percent of public shareholders voted against changing the terms of employment of Parekh. This includes slashing the vesting period of performance-based shares every year, as opposed to after three years before.

It was opposed on grounds of shrinking operating margin, despite rise in revenue and lack of appreciation of Infosys' share price.

“From a small investor point of view, it is definitely not good news to see such a decline in share prices of such a trusted and storied brand,” an investor said. It would affect people like him financially, the investor, who didn’t wish to be named, said.

“Best to await details of investigation inquiry by the company before drawing any conclusions. It can't be blindly assumed that all accusation by whistleblowers are correct,” Vinay said.