Infosys should have been more forthcoming with disclosures: Analysts
Infosys, the storied information technology services firm, should have taken faster action and been more forthcoming with disclosures to contain the slide in the value of its shares on account of whistleblower complaints, several market analysts said.
The Bengaluru headquartered company’s shares plunged 16% on the Bombay Stock Exchange (BSE) on Tuesday. On Monday the company’s ADRs (American depositary receipts) on New York Stock Exchange and NASDAQ fell 14%.
While Infosys' image has certainly taken a beating due to the whistleblower complaint, analysts believe that customer acquisition or deal making may not be seriously impacted as long as the company moves quickly to disclose the findings of the investigation.
On Wednesday, at the close of trading, the company’s shares had gained 1.16% on the BSE.
"Infosys is always under great scrutiny by the media and investors as it is one of the most admired Indian companies. Post the board meeting of October 11, the company could have put out a simple statement about the whistleblower complaints and that the board had commissioned an independent investigation," Shriram Subramanian, founder of Bengaluru based corporate governance and advisory firm InGovern, told TechCircle.
On Monday, financial daily The Economic Times reported that a whistleblower group that called itself ‘ethical employees’, had complained against Infosys. The group alleged that the company was taking unethical steps to boost its short term revenue and profit numbers.
According to a statement from Infosys to the BSE on Tuesday, one of its board members received two anonymous complaints on September 30, 2019, titled ‘Disturbing unethical practices’ and the second undated with the title, ‘Whistleblower Complaint’. Following its internal policy, the firm placed both complaints before the Audit Committee on October 10, 2019, and before the non-executive members of the Board on October 11, 2019.
The letter also alleged that chief executive Salil Parekh was bypassing reviews and approvals for larger deals. "He (Parekh) directs them to make wrong assumptions to show margins. (The) chief financial officer or CFO is compliant and he prevents us from showing in board presentations large deal issues. Several billion-dollar deals of the last few quarters have nil margin," the letter said.
Infosys announced its quarterly earnings for the second quarter of financial year 2019-2020 on October 11. At the press conference to announce the earnings, the senior management did not speak about the whistleblower complaints and nor was there any mention of the complaints in the company's statements to the BSE or media outlets.
InGovern's Subramanian said that the whistleblower complaints were first reported in the media and it seems like the company did not accord the complaints the importance and urgency they truly deserved.
"Some of the whistleblower allegations of accounting irregularities and withholding of information from auditors and the board are very grave and deserve express investigations. More so, because the propriety of the CEO and the CFO have been called to question.," Subramanian added.
However, the company could limit the damage caused by the allegations by speeding up the investigation process and publishing the key findings sooner than later.
"We will have to wait for the investigation's conclusion. Prima facie, it does not seem like the management had any wrong intention in not announcing the disclosure during the quarterly results. We know them and they have been around. While a full disclosure on the findings of the investigations is not expected to be made public as it involves sensitive competitive deal-making data, investors will expect the company to be more forthcoming than it has been the last time," said Harit Shah, IT analyst at Mumbai-based brokerage firm Reliance Securities.
This is not the first time that Infosys has faced such allegations. A whistleblower had earlier alleged irregularities in the Infosys-Panaya deal. The IT company had written off most of the value of the $200 million acquisition of the Israeli startup and was reportedly one of the reasons why former chief financial officer Rajiv Bansal quit the firm. The allegations also saw the exit of former chief executive Vishal Sikka.
Infosys had appointed a law firm to investigate the deal and did not find any irregularities. However, the company did not provide any further details about the investigation.
Unlike the previous allegations, this time the complaint pertains to an ongoing issue of accounting irregularities during the current financial year and could have serious repercussions for investors who have put money in the company's shares according to the information they received from the board and the management of the company.
"Investors have to be assured that the numbers they have been presented are reflective of the true books. It is imperative that the company conclude the investigations and table the details to investors within a month or so," said InGovern’s Subramanian.
According to Sanjeev Hota, vice president and head of research at Mumbai based brokerage firm Sharekhan, while most companies get such whistleblower complaints every now and then, they are not required to disclose those to investors. "Since this was a serious allegation, the company management rightly took it to the board apart from alerting the auditors," he said.
However, Hota added that there will be an overhang on the company's share price in the near term. “While the company has not been the gold standard during the last three-four years, like it was previously, when these issues are out in the media time and again, people are worried and there will be a near-term overhang over its valuation," he added.
"The company's exposure to foreign institutional holding means that they will want more clarity or else they will find other places and companies to invest. Domestic investors in such big companies are not as fickle," another analyst said on the condition of anonymity.
"Being a public company, the nature of allegations mean that it will have a bearing. But people will put this behind them and with the kind of fall it has seen yesterday, there is only upside now," Reliance Securities’ Shah added.