Markets regulator to investigate allegations of unethical practices by the company
An initial analysis found that put positions were fully hedged, making it hard to detect insider trading in them
Mumbai: The markets regulator is set to order a forensic audit into Infosys Ltd’s books following whistleblowers’ allegations that its top executives were involved in financial irregularities, two people with direct knowledge of the matter said.
The Securities and Exchange Board of India’s (Sebi’s) decision comes after Infosys’s internal audit committee on 10 January concluded that the charges made by the whistleblowers were substantially without merit. The findings of the internal audit were shared with the regulator.
“The findings that it has come to is immaterial to Sebi’s probe. The regulator’s investigation so far has in fact warranted a deeper analysis. Sebi is in the process of appointing a forensic auditor for a thorough examination of the allegations of unethical practices," said one of the two people cited above, requesting anonymity.
Infosys’s efforts to move beyond the controversies that have dogged the company over the past few years have failed to yield desired results. In the latest controversy, anonymous whistleblowers, in a letter to the company’s board, alleged that chief executive Salil Parekh and the company’s chief financial officer indulged in “unethical practices" to boost revenue and profits. The whistleblower complaint, which was also sent to the US Securities and Exchange Commission on 30 September, became public on 21 October. Sebi took suo motu cognizance of the issue after the complaint became public.
A spokesperson for Infosys declined to comment, but said that the company would continue to cooperate with regulatory authorities.
On 8 November, Sebi chairman Ajay Tyagi had indicated that its probe was independent of statements made by Infosys.
“The investors, if they want, can take comfort from Infosys’s statement, but our probe is still on. This is all I can tell you," Tyagi said, adding that people wishing to check Infosys’s financial figures should “ask god". This came after Infosys chairman Nandan Nilekani defended the sanctity of the company’s numbers, saying even “god can’t change the numbers".
An email sent to a spokesperson for Sebi was not answered immediately.
Sebi is also investigating a huge build-up of derivatives positions in the stock before allegations of accounting malpractices were made public.
Exchange data showed that huge put positions, or the option to sell shares at an agreed price on or before a particular date, were accumulated in the November series contracts of Infosys at a strike price of ₹740.
“In the prelim analysis, the regulator has found that these positions were fully hedged, making it difficult to pinpoint whether there was any insider trading," said the second of the two people cited earlier.
Subsequently, Infosys told stock exchanges in October that it had referred the complaint to its audit committee.
Excerpts of the findings of the audit committee, which was assisted by law firm Shardul Amarchand Mangaldas and Co., and PricewaterhouseCoopers Pvt. Ltd, were made public along with the company’s fiscal third quarter earnings.
The committee gave a clean chit to the company on anomalies such as visa costs, large deals, reversal of certain provisions and non-disclosure of key information.
“The allegations regarding the visa costs are unsubstantiated. The costs incurred towards visas by the company are appropriately accounted for," the audit committee report said. “The allegations regarding large deal approvals are unsubstantiated. Large deals under the investigation team’s review were approved by the necessary stakeholders. In the case of one large deal, a post-facto approval was sought. The joint ventures were approved by the board and the audit committee. No evidence was found suggesting CEO’s involvement in bypassing the deal approval process or issuing any instructions in this concluded that no restatement of previously announced financial statements or other published financial information is warranted."
In the December quarter, Infosys reported better-than-expected earnings. Profit rose 23.5% to ₹4,457 crore from a year earlier. Revenue rose 7.9% to ₹23,092 crore. It also revised upwards its FY20 revenue outlook to 10-10.5% growth in constant currency.