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Infosys to probe whistleblower allegations 'to fullest extent', says chairman Nandan Nilekani; shares tank over 14%

FP Staff

Infosys chairman Nandan Nilekani said the anonymous whistleblower's complaint into alleged financial misconduct and "unethical practice" is being dealt with by the IT major in an objective manner. In a statement released today, Nilekani said, "will ensure whistleblower allegations are probed to the fullest extent," he said.

Nilekani said one board member had received two anonymous complaints on 30 September 2019€"one dated 20 September 2019, titled "Disturbing unethical practices" and an undated note with the title, "Whistleblower Complaint", a PTI report said.

He said both had been placed before the audit committee on 10 October 2019, and before the non-executive members of the board the following day. "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 noted in his statement.

The board, in consultation with the audit committee, will take such steps as may be appropriate based on the outcome of the investigation, he added.

The whistleblower complaint by a group that calls itself "ethical employees" had alleged CEO Salil Parekh and CFO Nilanjan Roy were indulging in "unethical practices" to boost short-term revenue and profits.

"We have high respect for all of you and bring to your notice the unethical practices of CEO in recent quarters. Same measures are taken up in the current quarter also to boost short term revenue and profits," the letter addressed to the board of directors dated September 20, read.

The whistleblowers said they have emails and voice recordings on these matters.

Infosys has, meanwhile, recused both the CEO and CFO from this matter to ensure independence, the statement said.

The law firm, Shardul Amarchand Mangaldas has been roped in to conduct independent investigation, the statement said.

Read full text of Nandan Nilekani's statement here

A statement from Infosys said: We are providing an update on the steps taken in response to the anonymous whistleblower complaints ("Complaints") that the Company disclosed on October 21st, 2019. One Board member received two anonymous complaints on September 30, 2019 one dated September 20, 2019 titled "Disturbing unethical practices" and the second undated with the title, "Whistleblower Complaint." 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 undated whistleblower complaint largely deals with allegations relating to the CEO's international travel to the US and Mumbai.

'Ethical employees'

According to some media reports, a group of employees describing themselves as 'ethical' employees have written to the Infosys Board of Directors and the US SEC alleging unethical practices by its CEO Salil Parekh in recent quarters.

The letter to the Board and the SEC alleges that Infosys's senior management has focused on boosting near-term revenues and profits by:

1) Way of not fully recognizing certain costs such as visa costs; and

2) revenue recognition related to some large deals not being in line with accounting standards.

Further, the letter claims the CEO has bypassed the regular process of reviews and approvals relating to large deals and also suggests some of the large deals have no margins, according to Emkay Global Financial Service. The letter also alleges that there is more pressure to boost treasury profits by taking additional risks.

Infosys shares tank

The news reports sent the shares of the company into a tailspin. Infosys shares plunged 16 percent on Tuesday, marking their worst intraday drop in over six years.

At 11 am, the shares recovered but was still down by 14.62 percent to Rs 655.50.

The allegations come just two years after India's Number 2 software services firm endured a shake-up that saw its top boss Vishal Sikka leave the company.

Negative news to dominate investor attention

"While we are not in a position to ascertain the truth of the allegations (note that Infosys has referred this matter to the Audit Committee who is investigating), the news flow around this may dominate investor attention in the near term and could continue to support the shift toward TCS (especially after September 2019 quarter results) despite Infosys's results being a tad better than TCS vs. Street expectations, said Emkay Financial Service.

"We have currently a Hold rating on both Infosys and TCS along with underweight positions in sector EAP although a higher UW on TCS. HCL Tech remains the lone Buy-rated stock for us as we continue to see near-term revenue growth moderation - more so for Tier-II techs vs. Tier-I techs€"posing risks to consensus expectations for FY21 as well," the research and investment firm said.

What is Infosys issue about

Parekh and Roy have been accused of indulging in unethical practices, according to media reports, after the whistleblower's group, called Ethical Employees, reportedly sent a complaint to the US Securities and Exchange Commission and the Infosys board against him.

"Parekh and Roy have been resorting to unethical practices for many quarters, as evident from their e-mails and voice recordings of their conversations," said the complainants, who called themselves 'ethical employees' in a two-page letter to the Bengaluru-based IT behemoth's board of directors on 20 September, a copy of which has been accessed by IANS.

The whistleblower's report alleged that Parekh directed his senior employees to make wrong assumptions to show the margins.

The employees' group, Ethical Employees, in a letter dated 22 September 2019, claimed that they have voice recordings of Parekh and Roy, in their possession to prove the allegations against Parekh.

The plaintiffs are confident of sharing the alleged emails and voice recordings with investigators when demanded.

"The CEO is bypassing reviews and approvals and instructing sales (teams) not to send mails for approvals. He directs them to make wrong assumptions to show margins," recalled the unnamed Infoscions.

The employees also alleged that Parekh bypassed reviews and approvals to get bigger deals.

The letter alleged that several billion-dollar deals in the past few quarters had no margin and asked the IT major to examine the deal proposals, margins, undisclosed upfront commitments made and revenue recognition with the help of auditors, according to a news report.

The letter added that the complainants were asked to not fully recognise visa costs in the quarter and were pressured to not immediately recognise $50 million in reversals in a contract, according to a report in The Economic Times.

The employees also alleged that in the quarter under review of fiscal 2019-20, the management put immense pressure on them to not recognise reversals of $50 million of upfront payment in FDR contract, as it will slash profits for the quarter and negatively affect the company's stock price.

The letter said not recognising reversals of upfront payment in FDR contract was against fair accounting practice, according to an IANS report.

"Critical information is hidden from the auditors and board. In large contracts like Verizon, Intel and JVs (Joint Ventures) in Japan, ABN Amro acquisition, revenue recognition matters are forced which is not as per the accounting standards," said the letter.

The employees said they have been instructed not to share large deal information with auditors.

Alleging that the CFO (Roy) was hand in glove with the CEO (Parekh), the insiders said the former complied with unethical practices, restraining ethical employees from showing large deal issues to the board during presentations.

Jayesh Sanghrajka, VP and deputy CFO resigned after Q2 results

Last week, the IT major's executive vice-president and deputy CFO Jayesh Sanghrajka quit the company, three days after Infosys announced its Q2 results.

He resigned from India's second-largest IT services company after working with it for about 14 years over two stints, said a media report.

In November last year, Sanghrajka was made the interim CFO after the then CFO, MD Ranganath, quit the company, said a report in The Times of India.

Sanghrajka played major role in the company's recent share buybacks in which Infosys repurchased shares worth Rs 8,260 crore that began in March, said the report. His second innings at Infosys began after he was appointed as the interim CFO.

Sanghrajka had rejoined the company in December 2012 as vice president and corporate financial controller. Prior to that, he was with IT major from 2000 to 2007 as general manager, finance.

Whistleblower complaint against Infosys earlier, too

In 2017, a whistleblower report had alleged wrongdoings by Infosys and some officials in the $200 million acquisition of Israeli automation technology firm Panaya by the Bengaluru-based IT services firm. An internal audit committee set up by Infosys later found no evidence supporting the whistleblower's allegations.

However, Infosys founder N R Narayana Murthy had demanded that the full report by Gibson, Dunn and Crutcher on these whistleblower allegations be made public.

Later in October 2017, the Infosys board€"under its then new chairman Nandan Nilekani€"gave a clean chit to the controversial Panaya acquisition, saying there was no merit in the allegations of wrongdoing.

It had also said that after a "careful re-consideration" it has concluded that putting out more details of the probe would "inhibit the company's ability to conduct effective investigations into any matter in the future".

-- With inputs from agencies

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