Govt may ask fraud office or Registrar of Companies to investigate Infosys

The Ministry of Corporate Affairs may ask the Serious Fraud Investigation Office (SFIO) or the Registrar of Companies to investigate whistleblower allegations of corporate misgovernance at Infosys, three government sources told Moneycontrol.

Such a decision, if it is taken, will become a major distraction for India’s second-largest software services company and could cause reputational damage among stakeholders in India and overseas.

“(Since it) is alleged to be a lapse of corporate governance and non-adherence of ethical standards to boost revenue, it becomes important for the government to step in and investigate,” said a senior government official. “MCA and SEBI (capital markets regulator Securities and Exchange Board of India) might have to work together, exchange data and information they find during the investigation.”

SEBI has already started its investigation into allegations of unethical practices. It is also seeking to find out if there was any insider trading.

In two letters to the company and one to the Office of the Whistleblower of the US securities regulator SEC, the complainants have made a number of allegations that they say are backed by email and voice recording evidence.

They claim that CEO Salil Parekh and finance chief Nilanjan insisted that visa costs not be recognised, instructed the team not to share key information with the board and auditors and brought pressure to change investment policy and accounting without informing the board or the auditors. Besides, the whistleblowers allege that Parekh made unauthorised personal claims for reimbursement.

Among the high-profile cases that the SFIO is investigating are alleged frauds at Religare Enterprises, IL&FS and Bhushan Steel. The fraud office is also probing Deloitte based on a whistleblower complaint. Deloitte is the statutory auditor for Infosys, but there is not suggestion of any wrongdoing by the audit firm.

In July, Finance Minister Nirmala Sitharaman told the Lok Sabha that the SFIO had been assigned 79 cases in the previous three years and the regional directors of the Registrar of Companies 256 investigations.

Another government official said that Infosys will have to go through investigation of its customer contracts, stock transactions, undisclosed upfront commitments and revenue recognition. “The recent allegations will not just bring the management under scrutiny, it will also be on the company board,” said this source.

A third official said that the ministry was “keeping a close watch” on Infosys developments to see if there are any violations of the Companies Act. “MCA is waiting to see what SEBI shows up,” the official said.

Infosys, once considered the gold standard in corporate governance, has seen its sheen wear off in recent years. Chief Financial Officer Rajiv Bansal resigned in August 2015 with a severance package of Rs 17 crore that was disclosed only in the annual report. Infosys not only ended up paying Bansal but also had to settle with SEBI by paying Rs 34 lakh as consent fee.

In August 2017, CEO Vishal Sikka and several board members resigned after cofounder NR Narayana Murthy made allegations of conflict of interest. Nandan Nilekani, who succeeded Murthy as CEO and was instrumental in the Aadhaar unique identity project, came out of retirement to guide Infosys as non-executive chairman.

Nilekani has sought to assure stakeholders of a transparent inquiry and announced the appointment of law firm Shardul Amarchand Mangaldas to conduct the investigation into the whistleblowers’ claims. Parekh and Roy have been recused from the inquiry.

Infosys on October 24 informed the stock exchanges that the Securities and Exchange Commission (SEC) had started an investigation into whistleblowers’ complaints.

The government investigation, a source said, will have to be “multi-layered,” involving a high degree of collaboration between the Ministry of Corporate Affairs and SEBI. “The Infosys probe might be one such case where the MCA and SEBI might benefit from each other’s expertise.”

The MCA and SEBI had in June signed a memorandum of understanding for data exchange.