Just when Infosys, the Indian software and IT service provider sector, was shrugging off its sluggishness and moving up the value chain to catch up with the requirements of potential clients in the US and Europe, the news that the iconic IT major has fudged numbers has come as a bolt from the blue.
On Tuesday (22 October), the share market, taking a clue from the US stock market, reacted with panic, bringing down the market capitalisation of the company with a thud"Infosys shares tanked by a whopping 16.21 percent (Rs 53,000 crore in terms of its market capitalization) in a single day's trade on the back of the shattering allegations of fudging.
The shattering allegations by 'ethical employees', an anonymous group that Infosys' CEO and CFO combined to show profits where none existed is a throwback to Satyam whose epicentre too was the US.
In 2008, American investors in Satyam Computers Limited (Satyam) voted with their feet when they got wind of the shenanigans of its promoter Ramalinga Raju who blithely booked fictitious sales to boost its bottom line and to match which, i.e. to complete the double-entry he had the gumption to forge fixed deposit receipts of banks. The Indian market followed suit. Class action suit quickly followed in the US to a telling effect.
Infosys ADR investors in the US, too, have been quick to set the class action suit in motion. There is, therefore, now a sense of dÃ©jÃ vu.
Of course, the two situations are not exactly the same. Raju made a clean breast of his shenanigans whereas the Infosys management led by one of its co-founders, the redoubtable Nandan Nilakeni, is looking into the matter.
The whistle-blowers said recent big deal wins may have come with negligible margins.
The silver lining for Infosys hopefully is the final audited accounts themselves are not under a cloud.
What is under the cloud are profit projections. Nevertheless, Infosys must be worried because while Satyam cocked a snook at the Indian investors even while settling a huge class-action suit in the US, it does not have that luxury now.
The Indian Companies Act, 2013 has a class action suit mechanism in place. That could compound Infosys' agony.
In its filing with the exchanges, Infosys said its internal auditor EY and law firm Shardul Amarchand Mangaldas & Co would conduct an independent probe while its statutory auditor Deloitte had been informed about the investigation. One tends to be skeptical of such 'internal' enquiries. It is good that the SEBI has stepped in and started asking questions. The US SEC is taking up cudgels for American investors. It is in the fitness of things that SEBI should bat for the Indian investors.
Nilekeni is relying on audit committee which is carved out of the board of directors. The audit committees have never inspired the confidence of investors. Remember there is also an allegation of recognizing profits in the accounts where none existed or was premature to recognize when one of the basic tenets of accounting is conservatism.
The statutory auditors of Satyam PWC attracted flak for its docility if not complicity with Raju's fudging of accounts. Fortunately for the statutory auditors of Infosys, Deloitte, they still have the time to redeem themselves by sifting the grain from the chaff and petitioning for reopening audited accounts if they were remiss in not dredging up the accounting skullduggery in the financial year 2018-19.
(The author is a senior columnist and tweets @smurlidharan)