Infosys’ stock closes 16.21% lower at ₹643.30 at the end of Tuesday’s trade over allegations of unethical practices by CEO Salil Parekh and CFO Nilanjan Roy.
By NEHA BOTHRA, Oct 22, 2019 4 min read
Information technology (IT) giant Infosys’ stock took a severe beating at the bourses on Tuesday over allegations of unethical practices by the company’s chief executive officer, Salil Parekh, and its chief financial officer Nilanjan Roy. At the end of the day’s trade, Infosys investors saw massive wealth erosion as the company’s market cap fell by ₹52,995.93 crore.
The company’s stock opened 14% lower, touching an intra-day low of ₹638.30 per share. The Infosys stock closed 16.21% lower at ₹643.30 at the end of the day’s trade, while the benchmark BSE Sensex shed 0.85% to close at 38,963.84 points.
Brokerages have rung alarm bells. “The whistle-blower news could put the stock under pressure. It comes as a setback for the company and could de-rate multiples until clarity emerges. The stock has been volatile over the last six years due to idiosyncratic issues. We have an ‘equal weight’ rating on the stock with a price target of ₹805,” cautions Morgan Stanley in a note to investors.
There is a sense of déjà vu as these allegations are reminiscent of the whistle-blower complaints in 2017 when Infosys’ former chief executive officer, Vishal Sikka, was accused of overpaying for the acquisition of Panaya, an Israeli software company. Analysts recall that Infosys’ stock massively underperformed TCS and the BSE IT index that year in the wake of the controversy.
“The Infosys stock is up 17% in 2019, despite ~10% EPS (earnings per share) cuts (FY20), on the hope that a steady management structure will drive better business performance. The last time Infosys was mired in such a controversy was in 2017. While nothing was proven against the company, it resulted in CEO and other senior management exits, hurting the company’s performance,” notes a report by brokerage outfit Credit Suisse.
Technical analysts tracking the counter say the overall sentiment has turned negative for Infosys despite a good earnings’ show this quarter. “We believe investors will shift balance in the IT portfolio towards TCS in light of these allegations and the looming uncertainty. TCS can outperform Infosys in the near term,” says Arun Mantri, technical and derivative analyst, Karvy Stock Broking. “We see immediate support for Infosys shares at ₹630 per share versus our earlier estimate of ₹700 per share,” adds Mantri.
Corporate governance watchers are not impressed. “This matter needs to be taken seriously by the board. A thorough investigation is needed and we hope the outcome will be shared with investors this time,” says Shriram Subramanian, founder and managing director, InGovern, a proxy advisory and corporate governance firm. “Last time there was a whistle-blower complaint in 2017, there was a lot of noise, but the company did not share its full findings,” says Hemindra Hazari, research analyst.
In a scathing letter sent to Infosys’ board members on September 20, the whistle-blower complaint says, “Please ask auditors to check deal proposals, margins, undisclosed upfront commitments made and revenue recognition.” The whistle-blowers have sent a copy of the complaint, along with evidence in the form of emails and voice recordings, to the U.S. Securities and Exchange Commission. The global I.T. major’s American Depository Receipts plunged 12% on Monday on the back of the allegations.
The allegations suggest Salil Parekh bypassed approval processes, kept the board and auditors in the dark about several billion-dollar deals with negligible margins. The whistle-blowers also accuse Parekh and Roy of depicting an untrue picture of the company’s financials by twisting accounting norms to inflate near-term profits. The whistle-blowers’ complaint casts a shadow of doubt on the company’s ethics and raises red flags on possible lapses in corporate governance practices.
A month after the board was notified of the alleged malpractices, Infosys has sprung into damage control mode. “The company has received anonymous whistle-blower complaints alleging certain unethical practices. These have been placed before the audit committee as per the company’s practice and will be dealt with in accordance with the company’s whistle-blower policy,” it said in a statement issued to exchanges on Monday.
Nandan Nilekani, chairman, Infosys stepped in to assuage investors’ concerns. He said the audit committee, chaired by D. Sundaram, was investigating the matter and will take action in consultation with the board based on its findings. The audit committee was consulting EY on the matter, he said, and has roped in law firm Shardul Amarchand Mangaldas to conduct an independent probe into the allegations. “At the appropriate time we will provide a summary of the investigation results. The board is committed to uphold the highest standards of corporate governance and protect the interests of all stakeholders,” Nilekani said.