Law firm hired to independently examine claims made by whistleblowers
Audit committee has begun consultations with internal auditors on terms of reference for an investigation
Mumbai/Bengaluru: Infosys Ltd on Tuesday scrambled to contain the fallout from allegations of accounting malpractices that sent its shares plunging the most in more than six years by engaging accounting firm EY and law firm Shardul Amarchand Mangaldas & Co. to examine the claims made by whistleblowers.
In a statement, Infosys chairman Nandan Nilekani said that the company’s audit committee began consultations with internal auditors on terms of reference for an investigation into the allegations after its 11 October board meeting while law firm Shardul Amarchand Mangaldas was retained on 21 October to conduct a separate independent investigation.
To ensure an independent probe, Nilekani said chief executive Salil Parekh and chief financial officer Nilanjan Roy have been recused from this matter. “The board, in consultation with the audit committee, will take appropriate steps based on the outcome of the investigation," he said.
The move to start an independent investigation comes as investors dumped shares of Infosys. The company lost $7 billion in market value on Tuesday as it plummeted 16.2% to close at ₹643.30, marking its steepest single-day drop since 12 April 2013.
The sharp fall in share price was not the only bad news for the Bengaluru-based software services company that is considered to be the gold standard for corporate governance in India.
On Tuesday, New York-based Rosen Law Firm said it is preparing a class action lawsuit to recover losses suffered by Infosys’s shareholders. The company’s American depository receipts had fallen 3.61% to $8.955 on the New York Stock Exchange at 9.55pm (IST).
The law firm said in a statement that it is investigating potential securities claims on behalf of shareholders of Infosys resulting from allegations that the company may have issued “materially misleading business information to the investing public."
Analysts expect the allegations will remain an overhang on the Infosys stock.
“We expect the stock to be volatile till the company clarifies on these complaints," brokerage firm Motilal Oswal said in a note.
Analysts also fear that allegations of unethical accounting practices could lead to a de-rating of the stock.
“The key allegation is many recent large deals wins have negligible margins and revenue and cost recognition have not adhered to accounting norms to help improve near-term profitability. The issue is likely to remain an overhang pending further clarity," brokerage firm Jefferies said in a note on Tuesday.
To be sure, this is not the first time Infosys is dealing with a major whistleblower issue.
In 2017, a complaint emerged alleging irregularities in the $200 million acquisition of automation technology company Panaya. The episode eventually saw the exit of then CEO Vishal Sikka, although he was exonerated by the board after his departure from the company.
In 2013, Infosys agreed to pay $34 million to settle a civil lawsuit with the US government that charged it with visa fraud and errors in immigration records of its employees, triggered by a case filed by Jack Palmer, a former US-based employee, in 2011 in an Alabama court.
Hetal Dalal, chief operating officer at proxy advisory firm IiAS, said one will have to wait to see the impact of the allegations as their materiality has not been quantified yet.
“The disclosure of such a complaint is driven by how material the information is. Right now there are a bunch of allegations, but one does not how material these are. Further, there is no aggregate quantification of the allegations. The current board has experience in dealing with whistleblower letters," she said.
However, other proxy advisory firms said that a company’s disclosures on such events should not be restricted based on materiality of allegations since they point to important company policies such as accounting practices.
“Materiality is not the right measure when it comes to a policy matter. If accounting practices are being questioned, then materiality will be immaterial because you do not know what other policies too are not being followed," said J.N. Gupta, founder and managing director at Stakeholders Empowerment Services.