Another year. Another CEO. Another scandal. Infosys is facing allegations of serious impropriety for the second time in as many years. The Bengaluru-headquartered software company told exchanges that it had taken cognizance of a lawsuit filed against it in the United States by Rosen Law Firm.
The lawsuit is based on complaints by anonymous sources within the company. The allegations, though unproven, shaved USD 7 billion off the company’s market value in a single day – Infosys’ stock fell by 16 per cent since the letter penned by employees was made public.
On September 20, a whistleblower group that identifies itself as “Ethical Employees” wrote to Infosys’ Board of Directors and the United States Securities and Exchange Commission (SEC) alleging that C-suite executives including CEO Salil Parekh and CFO Nilanjan Roy were fudging the company’s financials to artificially shore up profits in the short term.
“He (Parekh) directs them (employees) to make wrong assumptions to show margins… In the last quarter, we were asked not to fully recognise the costs like visa costs,” the letter reportedly says. It further states that Parekh made racist comments against members of the board. “The company intends to defend itself vigorously in such a lawsuit,” said Infosys in a statement to exchanges.
This is not the first time that whistleblower complaints have rocked the boat at Asia’s second-largest software firm. In 2017, allegations of financial malfeasance surfaced regarding the acquisition of Israeli software firm Panaya. Infosys co-founder N.R. Narayana Murthy intervened to address the perception that the company had strayed from its ideological moorings. Vishal Sikka, who was at the helm, stepped down, citing “personal attacks” and a “continuous drumbeat of distractions.”
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U.B. Pravin Rao was made interim CEO. The board tapped Salil Parekh to take over the reins. Parekh was appointed the CEO and MD on December 2, 2017. But allegations of corporate governance have not gone away. And the latest chapter in the enduring saga could prove to be the most damning.
A whistleblower group accused Infy CEO Salil Parekh (R) and CFO Nilanjan Roy (L) of fudging the company’s financials to artificially shore up profits in the short term.
The U.S. SEC is probing the allegations as the lawsuit was filed in a New York court. India’s market regulator, the Securities and Exchange Board of India (SEBI) has initiated an investigation into the complaint and has requested additional information from the company.
Whistleblower allegations have, in the past, taken a toll on employee morale, and also invited punitive action from regulators. Infosys’ attrition rate stood at 21.7 per cent in the September quarter of 2019. TCS reported 11.6 per cent attrition for the corresponding period.
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Previous run-ins with regulatory authorities have cost Infosys dearly. The company paid USD 34 million to settle a US investigation pertaining to irregularities in visa applications and abuse of immigration processes. Here’s a timeline of events outlining Infosys’ handling of whistleblower complaints in recent years.
August 2014: Vishal Sikka takes over from S.D. Shibulal as the CEO of Infosys, becoming the first non-founder to occupy the corner office. Sikka was previously CTO at German software major SAP.
February 2017: A whistleblower alleges irregularities in the company’s USD 200-million acquisition of Israeli automation company Panaya. Co-founder N.R. Narayana Murthy questions the board’s decisions, implicitly equating the inordinately high severance paid to former CFO Rajiv Bansal with “hush money.”
Bansal was paid Rs. 17.4 crore (USD 2.7 million) upon quitting his job in October 2015. The coterie of founders made public their disaffection with corporate governance practices at the company, notably Sikka’s sizeable compensation and the hefty severance packages afforded to Bansal and the then chief compliance officer, David Kennedy.
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August 2017: The board rebuts Murthy’s claims, and in a statement to shareholders, makes the counterclaim that “Mr. Murthy’s campaign against the Board and the Company has had the unfortunate effect to undermine the Company’s efforts to transform itself.”
Vishal Sikka quits, citing the machinations undertaken by the founders to undermine the actions of the board. The board chairman R. Seshasayee, along with independent directors John Etchemendy and Jeffrey Lehman resign. Nandan Nilekani, an old hand, is appointed non-executive chairman.
October 2017: Internal and external inquiries unanimously clear Sikka of misconduct. Previously, the law firm Gibson, Dunn & Crutcher had concluded that there was no incriminating evidence to suggest that Sikka or any other employee of Infosys had profited from the acquisition of Panaya in 2015.
December 2017: Salil Parekh is named the next CEO of Infosys. He was previously a member of the group management board of Capgemini.
January 2018: Salil Parekh formally takes charge as CEO on January 2, 2018, marking the end of a prolonged standoff between the board and the founders.
April 2018: The board decides to place Panaya and Skava on the block. Infosys had paid around USD 200 million for Panaya and USD 120 million for Skava. Both companies were acquired in 2015 when Sikka was the CEO. Infosys finds that in the space of three years, both companies are now “value-less.”
A whistleblower pens a letter to regulators in India and the United States, picking holes in the economic rationale behind buying the two companies, and then wanting to sell them at a knockdown price.
May 2018: After a strong start to his second innings at Infosys, Nilekani finds himself batting on a sticky wicket. Another whistleblower missive to the SEC and SEBI claims that Nilekani, in his capacity as non-executive chairman, is “conniving with the current board to quietly bury all the wrongdoings of the earlier board.”
October 2019: A group of employees who identify themselves as “Ethical Employees” write to the Infosys board and the SEC alleging that CEO Salil Parekh engaged in accounting malpractice to inflate profits. Nilekani confirms that a board member had received two anonymous letters in September – one titled ‘Disturbing Unethical Practices’, and another, ‘Whistleblower Complaint’.
He says both were placed before the audit committee on October 10. When asked by the SEBI and BSE as to why these allegations were brought to their notice by the company, it says that the audit committee was reviewing the “generalized allegation” made in the complaint, and that disclosure was not required at that stage.
The company ropes in the law firm Shardul Amarchand Mangaldas & Co to conduct an independent investigation. Infosys issues a statement saying the case will be treated on its merits and in accordance with the company’s whistleblower policy. Infosys shares fall.
Shareholder wealth rose 23.45 percent under Parekh’s stewardship. The veracity of the whistleblower complaint is being investigated.
