Infosys tumbles 16% as whistleblowers accuse of unethical practices

Shares of Infosys tanked as much as 16 per cent to Rs 645 apiece on the BSE on Tuesday after the revelation that a group describing itself as ‘whistle-blower staffers’ had accused the management of hiding the true financial picture.

The latest charge is from an anonymous group, calling itself ‘Ethical Employees’. Their letter, dated September 20, was addressed to the board of directors and to the US markets regulator, the Securities and Exchange Commission (SEC). Infosys issued a statement that its audit committee was examining the allegations, in line with its policy on whistle-blowers.

The anonymous letter alleges the current management is taking ‘unethical’ steps to raise short-term revenue and profit. It says the Bengaluru-based firm’s CEO, Salil Parekh, had not taken the necessary approvals before entering into large deals.

“Several billion-dollar deals of the last few quarters have nil margin,” goes the letter. “In large contracts like Verizon, Intel, joint ventures in Japan (and the) ABN AMRO acquisition, revenue recognition matters are forced.”

The company issued a statement on Tuesday saying it has placed both Complaints before the Audit Committee on October 10, 2019 and before the non-executive members of the Board on October 11, 2019. "These Complaints are being dealt with in an objective manner. The undated whistleblower complaint largely deals with allegations relating to the CEO’s international travel to the US and Mumbai," the statement added.

The company further said that since the investigation is ongoing, there will be no further comment so that investigation may be conducted in a thorough and objective manner. At the appropriate time it will provide a summary of the investigations results. "The Board is committed to uphold highest standard of corporate governance and protect the interests of all stakeholders," it added.

“Post the board meeting of October 11, 2019 the Audit Committee began consultation with the independent internal auditors (Ernst &Young) on terms of reference for their prima facie investigation,” Infosys said in a regulatory filing today.

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, it added.

Reacting to the development, Infosys' ADRs (American depositories receipts), too, tumbled in the overnight trade on the New York Stock Exchange (NYSE). The domestic stock exchanges were closed on Monday, due to assembly elections in Maharshatra.

"Very serious news indeed. This equates to a corporate governance issue. Deputy CFO has also quit. This in itself is an indirect admission that something is rotten. Stock will now languish 10-15 per cent lower in the near term," said Harit Shah, Research Analyst at Reliance Securities.

The market is very unforgiving of companies that have corporate governance issues and while it would not be fair to directly jump to conclusions, this issue appears quite ugly at least on the surface, Shah added. The brokerage currently has a HOLD rating on Infosys.

At 09:41 am, the stock was trading over 13.50 per cent lower at Rs 663.50 apiece on the BSE. In comparison, the benchmark S&P BSE Sensex was trading 58 points or 0.15 per cent lower at 39,241.