The first rule of holes is, when you are in one, stop digging. But beleaguered Infosys Ltd (Infy) appears to be doing just the opposite.
A day after the damning whistleblower accusations came to light, there are more questions and concerns than confidence or comfort that Tuesday's early-morning company statement could provide.
Predictably, traders dumped the stock in truckloads with the scrip crashing more than 16 per cent on BSE and investors losing Rs 53,000 crore.
Proceeding with protocol, Infy's Chairman Nandan Nilekani said the audit committee was investigating in consultation with internal auditors EY, but why the board waited till Monday to launch an independent probe is rattling market watchers. It was only after the whistleblower letter became public that law firm Shardul Amarchand Mangaldas & Co was asked to look into the matter.
"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. The audit committee has now retained the law firm of Shardul Amarchand Mangaldas & Co. (October 21, 2019), to conduct an independent investigation," Nilekani said.
Two, why the company, which is often seen as a beacon of corporate ethics and upholder of good governance, failed to voluntarily make the necessary disclosures for an entire month is puzzling. Investor concerns appear rather valid given that Infy chose to keep its earlier investigative report on Panaya acquisition private, despite the clean chit given to the then management led by Vishal Sikka.
"The company should have ideally informed investors soon after receiving the complaint, though there's no such regulatory need to disclose whistleblower complaints," Shriram Subramanian, Founder, InGovern Research Services told Express.
While the ethical employees, aka whistleblowers, claimed to have supporting evidence including voice recordings and emails, Infy clarified that it didn't receive any such proof, which makes the complaint appear motivated by disgruntled employees, current or former. That Infy's deputy CFO Jayesh Sanghrajka's quit just days after the September quarter results on October 11 adds a new dimension to the fresh accusations.
Though the company will investigate the 'generalised allegations' to the fullest extent, Subramanian believes that besides the remarks on racism and misogyny, allegations of financial impropriety and whether revenues and profits are dressed up is a much larger issue.
CEO Salil Parekh and CFO Nilanjan Roy have been recused from the investigation into the allegations ranging from suppression of financial data on large deals from auditors and the board, non-adherence of revenue and cost recognition, irregularities in accounting practices to boost near-term profitability besides others. Nilekani, however, didn't attribute much weight to these issues and chose to centre his focus on this: "The undated whistle-blower complaint largely deals with allegations relating to the CEO’s international travel to the US and Mumbai."
In reality though, since Parekh's entry last January, Infy has been reporting strong momentum in large deal wins, and even prompted Nilekani to quip that Infy has become 'boring again.' According to Jefferies, the issue will likely remain an overhang in the near-term given it raises questions over the credibility of the current management. "We note that every 100 bps lower EBIT margin impacts FY20/21 EPS by 4.3 per cent but P/E de-rating could be the bigger risk, especially given that the recent re-rating in the stock has been driven by hopes of sustainable growth outperformance by the company under the new management," it noted.