The Infosys test

On Tuesday, Infosys shares fell over 16 per cent over the day of trade, marking the sharpest such drop in six years. Clearly, investors are spooked by news of fresh trouble at the top of India’s iconic software company. Whistleblowers, in a letter dated last month and now made public following publication in the Deccan Herald, complained that Infosys Chief Executive Officer (CEO) Salil Parekh, with the knowledge of Chief Financial Officer (CFO) Nilanjan Roy, was concealing crucial facts from the board committees, under-reporting costs to artificially inflate reported profits, and ordering employees to misrepresent the returns on certain business deals. Mr Parekh was even accused of misusing his travel privileges. While the whistleblowers claimed to have emails and voice recordings to back up their allegations, Infosys chairman — and one of the company’s founders — Nandan Nilekani said in a letter that none of this evidence had so far been made available to the company’s board. 

While the charges are just that, as they have not been proved as yet, the problem is that given the whistleblower letter was dated September 20, the company seemed to have taken too long to take action and this counts as a bad sign. There are disquieting parallels being drawn to the bruising battle two years ago, when former CEO Vishal Sikka was removed following a whistleblower complaint about a $200-million acquisition in Israel and the controversial intervention by another founder, N R Narayana Murthy. Mr Nilekani, in the letter, which he is obliged to write to the public exchanges in India and the United States, said the complaints have been laid before the audit committee and non-executive members of the board, and the CEO and the CFO have been recused from the discussion. Auditors EY, as well as the legal firm of Shardul Amarchand Mangaldas, are to conduct an independent investigation. In today’s fraught and politicised atmosphere, the whistleblowers’ allegation that Mr Parekh made derogatory remarks about some board members’ ethnicities may further raise concerns, and certainly spark even wider public interest in the investigation. Unfortunately, Infosys hasn’t given any timeline for completion of the investigation. It is vital that Infosys’ board recognises the importance of timely action, and that it must make an extra effort to restore market confidence. 

The plain fact is that Infosys, which faces an increasingly challenging environment in its core business, cannot afford to waste time dealing with problems caused by corporate governance. It is already trading at a discount to its larger rival TCS, and is nowhere near the 2020 revenue targets set under Mr Sikka. It must also recognise that allegations of impropriety of this sort are particularly dangerous at a time when the United States administration is actively looking for reasons to demonise Indian IT services companies like Infosys. It would not be an exaggeration to say that the entire IT story depends now upon how Infosys demonstrates responsiveness and transparency to this complaint. Given the company’s visibility on NASDAQ as well as the Indian stock exchanges, it is fair to say that the effectiveness and reliability of Indian markets themselves are also on trial. Only speedy action that takes the public and investors into confidence will ensure that the company, sector, and markets pass the test.

Business Standard is now on Telegram.
For insightful reports and views on business, markets, politics and other issues, subscribe to our official Telegram channel