Credit Suisse noted the allegations could weigh on the stock, whether proven right or not.
The Infosys stock crashed 16.2% on Tuesday to a 10-month low in the wake of whistleblower allegations of mismanagement on several counts even as chairman Nandan Nilekani sought to reassure investors, saying the allegations would be probed.
The company’s audit committee has retained Shardul Amarchand Mangaldas & Co to conduct an independent investigation.
The crisis has engulfed the software major just about two years after former CEO Vishal Sikka quit in August 2017 after whistleblower allegations surfaced, including some relating to the purchase of Panaya and hush money paid to executives. Subsequently, R Seshasayee, too, quit as chairman and was replaced by Nandan Nilekani, while Salil Parekh was appointed the CEO and MD in January 2018.
Analysts at Jefferies wrote: “…the issue is likely to remain an overhang on the stock in the near term given it raises questions over the credibility of the current management.” Credit Suisse noted the allegations could weigh on the stock, whether proven right or not.
“If proven, this can lead to the CEO and CFO being fired with potential SEC investigations against them. Even if these are not proven, this can kick-start a period of potential uncertainty amidst a management ranks and clients,” the analysts wrote.
Corporate watchers pointed out while a board member received two anonymous complaints on September 30, which was placed before the audit committee and non-executive members at the October 11 board meeting, this was disclosed to the exchanges only on October 21.
The company made no mention of it on the analysts call held on October 11. The whistleblowers, who are company insiders, have said in their letters that the management was indulging in “disturbing unethical practices”. They allege that several large deals have been signed at negligible margins, appropriate review/approval processes have been bypassed and information related to the large deals suppressed from auditors & board members.
Among the reasons for Sikka’s departure, sources said, was the interference by Infosys co-founder and shareholder NR Narayana Murthy. Murthy had asked the company to disclose the full report on the Panaya acquisition. In June 2017 after an investigation, law firm Gibson, Dunn & Crutcher submitted a report to the board, concluding that there was no evidence that any Infosys executive profited from the company’s decision to buy Panaya in February 2015. Among other things, including ‘malicious attacks’, Sikka had been reportedly unhappy with the appointment of Ravi Venkatesan as co-chairman.
Motilal Oswal noted the allegations on under-reporting of visa costs and investments in riskier treasury investments are unjustified. “The portfolio of treasury investments by the company – as disclosed in annual reports – indicates that there has not been a material change in the risk profile of investments between FY18 and FY19,” analysts said.
With Tuesday’s fall, investors lost Rs 52,996 crore and the stock has erased its entire gains in 2019.