The investor page of Infosys' website welcomes you with a quote from its legendary founder, N.R. Narayana Murthy. "Good corporate governance is about maximising shareholder value on a sustainable basis while ensuring fairness to all stakeholders: customers, vendor partners, investors, employees, government and society." The company is committed to defining, following and practising the highest level of corporate governance across all its business functions. "Integrity and transparency are key to our corporate governance practices and performance...," Infosys says.
But recent turn of events cast a shadow on the company's corporate governance practices. Murthy's "fairness to all stakeholders" statement is under question. The company's lily-white image appears tinged, and not for the first time.
The latest, first. A group of employees, likely from the company's finance team, wrote to the Infosys Board of Directors and the US Securities and Exchange Commission (SEC) alleging unethical practices by the company's Chief Executive Officer Salil Parekh. "In the last quarter, we were asked not to fully recognise costs like visa costs to improve profits," the mail, from the group identifying itself as 'Ethical Employees' and dated September 20, 2019, stated. "This quarter, there is a lot of pressure to not recognise reversals of $50 million of upfront payment in FDR (First Tier, Downstream and Related Entities) contract, which is against accounting practice," the mail added.
It goes on to say that critical information relating to large contracts was hidden from the auditors and the Board and that large deal approvals have irregularities. "(The) CEO is bypassing reviews and approvals and instructing sales not to send mails for approval. He directs them to make wrong assumptions to show margins. CFO (Nilanjan Roy) is complaint and he prevents us from showing in Board presentations large deal issues," the mail alleged. "Several billion dollar deals of last few quarters have nil margin." The company, in short, was allegedly trying to boost its near-term revenues and profitability prospects under the direction of its top management.
Analysts were quick to respond. In a note, Harith Shah of Reliance Securities called out the corporate governance breach. "Deputy CFO (Jayesh Sanghrajka) has also quit. This in itself is an indirect admission that something is rotten. The stock will now languish 10-15 per cent lower in the near term," he stated. "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. While we await developments on the Board investigation, given the stock is so widely held, it is very likely that some investors will vote with their feet and sell at least some of their holdings," he added.
The allegations broadly fall into four buckets: questionable accounting standards; ethics of top management; disclosure standards, and ethnic slur. While Shah sniffs trouble, there are many others who feel Infosys' current accounting practices are merely aggressive, not fraudulent.
When Business Today contacted Infosys for comments on the above issues, the company replied: "We don't have any additional information to share at this time, other than our statement, which was sent to exchanges this morning."
Questionable Accounting?
A former CFO of another IT services company told BT that accounting standards don't prescribe any rules on how visa costs should be treated. "It's usually left to the company - some take a hit in one-two quarters while others prefer to spread the costs over the life of the visa," he says, requesting anonymity.
On the pressure to not recognise reversals of $50 million of upfront payment in certain contracts, the former CFO says the treatment depends on how the contracts are structured: "Several factors such as visibility of the contract lifecycle and risks are taken into consideration before recognising such costs upfront. If it's a high-risk contract, then usually companies try to recognise it in one go, else it's usually spread over the tenure of the contract. There is no set treatment prescription by accounting standards."
Similarly, big deals with low margins appear to be less of an accounting issue and more of a management call. Haitong Securities mentioned in a note around the Infosys saga: "The practice of bidding at low margins is quite common across industry, especially with large deals to get a large client at the start and then optimise profitability."
One would, therefore, have to wait for the finer details to emerge on how these contracts were being structured in Infosys' case. But since the allegations come from whistleblowers within Infosys, there could be merit in them, industry watchers feel.
The whistleblower complaints, meanwhile, are a reflection of the tensions that large IT services companies face. A range of exponential technologies such as Artificial Intelligence is making companies re-skill their employees. Many Indian IT companies are taking time to make this pivot, which is putting pressure on revenues.
"Most traditional IT services companies are slower to change on account of well-established (albeit dated) services and practices that continue to deliver a large chunk of numbers," says Sanchit Vir Gogia, Founder and CEO of Greyhound Research, a technology advisory firm. "Having said that, these companies are also putting their weight behind new-age technologies and investing in skills to build practices that are important to be in line with the changes at the clients' end. Naturally, this balancing act between traditional services and new-age competencies is no cakewalk... and creative financial techniques are the most natural way out to keep investors at bay while the company quietly develops skills... Think of it like a duck that is paddling hard below the surface while appearing calm above the water," he adds.
Ethics at the Top
This isn't the first time questions are being raised about Infosys' exalted status in corporate governance. During the reign of Parekh's predecessor Vishal Sikka, whistleblowers had alleged that he overpaid for acquisitions, and Murthy himself spoke up against the huge severance packages of some employees (Rajiv Bansal and David Kennedy). Sikka's own compensation spiked over 50 per cent, something that was unheard of at Infosys. His insistence on lavishness during stays abroad and flying private jets for business trips irked the founders, who believe in frugality.
Infosys' trouble with corporate governance, however, started even earlier - in 2013, when Rohan Murty, Narayana Murthy's son, joined the company as an Executive Assistant to the Executive Chairman. At that point, Shriram Subramanian, Founder and MD of InGovern Research, a corporate governance advisory, noted that "there are solid reasons why recent observations at the company raise question marks about its adhering to corporate governance in spirit". The appointment, he added, was an "act of nepotism, broke an oft-repeated statement by the company founders that their children would not aspire for roles within the company".
In the latest whistleblower complaint, Parekh is the target. "The CEO spends two and half days in a week in Ecity (Electronic City in Bangalore) and the rest in Mumbai. All his travel expenses are paid by the company, for these weekly personal trips," the whistleblower letter alleges.
The question mark around ethics, together with the doubts created around the company's accounting practices, can lead to indecisions even within Infosys, analysts say. Credit Suisse noted that whether proven or not, the allegations can lead to a lot of uncertainty. "The nature of the allegations and the fact that they are coming from its own employees make this a serious matter. If proven, this can lead to the CEO and CFO being fired with potential SEC investigations against them. Even if these are not proven, this can kick-start a period of potential uncertainty amidst management ranks and clients. It will not be unreasonable to assume that such issues eat significantly into management bandwidth which may have a bearing on growth and execution for a company of Infosys' scale," the financial services company stated.
SEC has initiated an investigation around the whistleblower complaints. Infosys, in a statement, said that it would cooperate with the investigation.
Disclosure Standards
While the whistleblower letter was dated September 20, the news broke and became public only a month later, on October 21. Investors dumped the stock, as expected. Infosys' shares slid over 16 per cent on October 22, wiping out `53,000 crore of its market cap.
Infosys knew of the charges but did not inform its shareholders on time - another corporate governance lapse, according to some.
On October 22, Nandan Nilekani, Chairman of the company, finally released a statement to the stock exchanges. One Board member had received two anonymous complaints on September 30, 2019, he stated. "Pursuant to our whistleblower practice we have 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 statement reads. The company's audit committee has retained the law firm of Shardul Amarchand Mangaldas & Co to conduct an independent investigation. To ensure independence in the investigations, the CEO and CFO have been recused. Sources in Deloitte, Infosys' auditors, meanwhile, told BT that all auditor decisions will be also up for review by the audit committee.
Infosys may have followed the established protocol in setting up the investigations but being late in informing investors isn't something activist shareholders are willing to ignore. Subramanian of InGovern Research says that at the end of the day, if information is hidden from the Board, information is also hidden from investors. "Infosys, knowing that it is under tremendous scrutiny, should have been extra careful and should have informed investors in a timely manner. Otherwise, it is a question of hubris. That is why they have opened themselves up to class action lawsuits in the United States - the Board knew but did not inform the shareholders in a timely manner. Over 10 law firms have reached out to shareholders," he says.
At the time of going to press, one securities class action lawsuit had been filed in the US federal court.
Infosys may have to deal with insider trading headwinds as well. Once the whistleblower's letter became public, stock market observers started pointing towards several positions taken by traders indicating the possibility of insider trading. In the derivatives space, exchange data indicated unknown traders taking large 'put' position in contract series ending in September and holding their positions through October for a certain 'strike' price. In a 'put' option the buyer makes a profit if the price falls below the strike price before the expiration. The suspicion of insider trading is because these positions were created in a week's time, around the date mentioned in the whistleblowers' letter.
Ethnic Slurs
In their complaint, the whistleblowers mention: "CEO told us, 'No one in the Board understands these things. They are happy as long as the share price is up. Those two Madrasis (Sundaram and Prahalad) and Diva (Kiran) make silly points. You just nod and ignore them'."
On the face of it, this appears colloquial. But it doesn't project the Infosys CEO in good light. In fact, what he said, if proven, can be construed as ethnic slurs. The US particularly has low tolerance for any such comments.
All the three independent Board members referred to have a long, successful association with business. Kiran Mazumdar-Shaw is the Chairperson and Managing Director of Biocon. D.N. Prahlad is the Chairman of EdgeVerve, while D. Sundaram is the Vice Chairman and MD of TVS Capital Funds.
The audit committee's report that will unravel the indiscretion, the allegations, seen jointly with the ones made since 2013, do raise doubts around the company's systems, processes and culture - the same systems and culture that once made the company the poster boy of brilliant governance.