A series of allegations leveled by some employees by way of a whistleblower letter dated 20 September to Infosys board regarding alleged accounting jugglery by its top management, racist remarks and unethical behavior of its CEO Salil Parekh and chief financial officer Nilanjan Roy, has caused a bloodbath in the stock markets.
On Tuesday, Infosys shares lost nearly 17 percent, wiping out about Rs 53,000 crore of investor wealth in a flash. Even in the broader financial markets, there are fears about a likely cascading impact till clarity emerges on the issue. That's because Infosys is just not another technology company for India. It is one of the iconic institutions that every young engineer in India dreams of working with.
Infosys' founders"the likes of N R Narayana Murthy, Nandan Nilekani"are well-respected at home and across the world as icons and role models. Every time Infosys has found itself in the web of corporate governance issues (the last one was in connection with the exit of its former CEO, Vishal Sikka), it has caught wider public attention including from the government.
This time, the whistleblower allegations are even more serious. Nilekani, who is now Infosys chairman, has acknowledged the seriousness of the allegations by issuing a statement that promises an independent probe into the facts of the charges.
There are two main allegations in the whistleblower letter. First, the CEO and CFO pushed for fudging of accounts to overstate quarterly profits. Second, the CEO used unprofessional language to describe some of the board members hailing from South India.
Of these, the more serious allegation obviously is the fudging of accounts to rig share prices. The 'ethical employees' behind the letter alleged that CEO and CFO asked to show higher treasury profits and hide crucial financial details from the public to inflate profits. One can't say for sure these allegations are true until a probe is complete. But, if it turns out to be true, Infosys will have to do a lot of explaining to its shareholders. The integrity of one of the towering institutions in India will come under question.
The memories of erstwhile Satyam Computers whose accounts were fudged by founder B Ramalinga Raju for about seven years are still fresh in public memory. Satyam, too, was one of the prominent names of India's business story until then. The revelation destroyed its existence and the company was force-merged with Tech Mahindra under the watch of a government-appointed board. The allegations at Infosys aren't comparable to the Satyam episode if one goes by the scale of charges.
But the basic design of allegations is the same"cooking accounts violating rules. Some of the industry observers have commented already that this could be a case of storm in a teacup. But, if the accounts are proved to be fudged, it will not go down well with its shareholders. Infosys may also face probes at the regulator-level and will have tumultuous times ahead. At a time when the economic situation and forecast is grim, this would be a double whammy not just for Infosys, but for India Inc. as a whole.
To be fair, there is no basis to accuse the CEO and CFO of financial and behavioral misconduct until the charges are proved. Also, there are reports of some sizeable 'put positions' built-in Infosys shares coinciding with the date of letter. The angle, whether some employees deliberately kicked up a storm to make some quick bucks in the market, needs to be probed too.
Charges on accounting fraud are only one part of the story, racism is another. CEO Parekh is also alleged to have called some board members Madrasis and 'Diva'. So far, racist charges have not come up very prominently in India's corporate world as is the case in the west. If there is supporting evidence to prove Parekh's racist and sexist remarks, this could open up a Pandora's box and rules governing the conduct of top management will be questioned.
If charges against CEO Parekh on derogatory, racist and sexist remarks against board members calling them Madrasis and 'Diva' are true, this will mean that there are sick minds even at the leadership of India's iconic institutions that are supposed to be a role model in every sense to the rest of the industry. The question that arises is: What have our regulators done so far to ensure professional conduct in 'too-big-to fail' institutions?
There are no specific provisions in SEBI's regulations to check racism in companies. SEBI does not specifically prohibit racism or sexism, said Jayant Thakur, a policy expert, and a chartered accountant. "However, it encourages companies to self-regulate. It has asked them to form a Code of Conduct. The details of such Code, except insofar as independent directors is concerned, companies can decide for themselves. Infosys, incidentally, does have such a Code that does prohibit such things. Their Code applies to all"from the lowly intern to the CEO and if the allegations are proved, each can be subject to disciplinary actions that the Code itself mandates," he said.
Regardless of the probe outcome, these allegations should trigger a debate about revisiting corporate governance norms for large Indian companies. If there is a possibility of accounting fraud in a company like Infosys, it is needless to talk about smaller companies. The same is with charges of racism.
India needs to have a comprehensive regulatory framework to monitor the conduct of top management in large companies at the regulatory level. The role of auditors has repeatedly come under question in the aftermath of every such incident; if the charges are true, the probe needs to be widened to cover that angle too.