Mumbai, October 23: The shares of IT major Infosys nosedived 15 per cent on Tuesday, its biggest fall in over six years after anonymous whistleblowers accused the Chief Operating Officer (CEO) Salil Parekh and Chief Financial Officer (CFO) Nilanjan Roy of "unethical practices". There has been a panic in the market among the Infosys shareholders after that.
Infosys recently grabbed headlines after some employees anonymously wrote to the US Securities and Exchange Commission, alleging that the IT major took unethical measures to boost profits and short-term revenue. Here's an explainer about the entire incident and what has gone wrong to how the IT major is grappling with the current situation. Infosys Shares Nosedive by 16% After Whistleblowers Allege 'Unethical Practices', Crash Wipes Rs 53,452 Crore Off Investors' Wealth in a Day.
Anonymous letters Written to US Securities and Exchange Commission
An anonymous group, calling itself ‘Ethical Employees’, in a letter dated September 20, alleged that Infosys’ management was taking “unethical” steps to raise short-term revenue and profit.
The letter further quotes, “(The) CEO and CFO are asking us to show more profits in treasury by taking up risks and make changes to policies. This will provide short-term profits". They ask us not to make key disclosures in (Form) 20F (a format required by the Securities and Exchange Commission for specified information) and annual report, and to share only good and incomplete information with investors and analysts.”
The two anonymous complaints dated September 20, and received on September 30 by one of its board members, were placed before the audit committee on October 10 for examination. Whistleblower Jack Palmer further claimed that Infosys misused short-term visitors' visas to bring in low-cost workers from India.
Allegations Include Fudging Financial Data, Inflating Profits & Passing Misogynistic Comments at Many Executives
The letters have accused Parekh and Roy of fudging financial data related to company operations including inflating profits in recent quarters. Further allegations of passing racist and misogynistic comments at many executives of the company have also been levelled against them.
The letter added that they have emails and voice recordings on these matters. Further alleging that critical information has been hidden from the auditors and board members as well. "In large contracts like Verizon, Intel and JVs in Japan, ABN Amro acquisition, revenue recognition matters are forced which are not as per accounting standards. We have emails and voice recordings and will share when investigators ask us. We are asked not to share large deal information with auditors," the whistleblower said in the letter.
In order to increase short-term profits, the whistleblowers stated in the letter that Roy and Parekh instructed the employees to not present data on large deals and important financial measures as it will attract board attention. They were also asked by the CEO and CFO to 'show more profits' in the treasury.
Chairman Nandan Nilekani steps in
After the company's stock took a massive hit and a panic situation was created among the investors. Infosys co-founder and company Chairman Nandan Nilekani stepped in to grapple the crisis that has led to Rs 53,000 crore erosion in market cap following allegations of unethical practices.
On Tuesday, Nilekani swung into action by informing the exchanges that the company was conducting an investigation into the complaints of a whistle-blower. The Chairman has reportedly taken control of the situation and is engaged with all stakeholders to tackle the concerns of investors
Infosys Hires Law Firm to independently investigate the allegations of the whistleblower
Infosys has hired law firm Shardul Amarchand Mangaldas to independently investigate the whistleblower allegations that have resulted in an erosion of Rs 53,000 crore in its market cap. For a fair probe, Infosys has constituted a committee, which began its consultation with independent internal auditors EY, and has retained law firm -- Shardul Amarchand Mangaldas & Co. to conduct an independent investigation.
CEO Salil Parekh and CFO Nilanjan Roy have been recused from the matter to ensure the independence of the probe, Infosys non-executive chairman Nandan Nilekani said in a statement to regulators.
What to expect now
The complaints, according to Nilekani, will be dealt with in an objective manner. In order to ensure a fair probe, both the CEO and CFO have been asked to go on leave till the investigations are over. Brokerage firms have advised shareholders to proceed with caution. Morgan Stanley has said that this will surely be a huge set back for the IT Major. Experts have opinioned that the first step for Infosys in resolving the matter is to calm the investors and ensure that there is complete transparency in the probe.
Credit Suisse firm on Tuesday also said that the nature of allegations and the fact that it is coming from the employees make it a serious issue. "If proven, this can lead to the CEO and CFO being fired with potential SEC investigations against them," said the firm.