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Infosys loses its lustre as governance fears return

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Via Financial Times

When celebrated entrepreneur Nandan Nilekani returned in the middle of 2017 to chair Infosys, the Indian IT pioneer he helped create more than three decades earlier, it was to draw a line under an ignominious chapter in the company’s history.

A public row involving everyone from founder Narayana Murthy to the board had culminated in the resignation of the then chief executive, amid damaging anonymous complaints and an accusation that Infosys paid “hush money” to a former director. The crisis both smashed the company’s share price and gripped corporate India. 

Two years later, they could be forgiven for feeling déjà-vu. A new round of whistleblower complaints, purportedly penned by current employees of the Bangalore-based company and this time alleging accounting irregularities, has led to a dismal week for the outsourcing company. 

Infosys’ share price at the Bombay Stock Exchange fell over 15 per cent on Tuesday, the US Securities and Exchange Commission launched a probe and the company is now facing a class-action lawsuit in the US. India’s securities regulator has also asked Infosys for more information about the complaints.

“There’s a tonne of emotion from across the country,” said Sanchit Vir Gogia, founder of advisory firm Greyhound Research. “Infosys is such a darling of the country.” 

Until this week there was comfort that Infosys was faring better under the steady stewardship of Mr Nilekani, one of India’s most-recognisable business leaders-turned-policy makers, and chief executive Salil Parekh, poached from French rival Capgemini in late 2017. The company signed large contracts worth $2.8bn in the last quarter, and just last month its shares were at record highs

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Bullish investors bet the company was regaining its hard-earned reputation as one of the jewels of corporate India. Founded by Mr Murthy and six other engineers with $250 in capital in 1981, Infosys helped put India on the global business radar by convincing multinationals to outsource their back-office work to its teams of workers. Its services include setting up and managing their clunky IT systems — streamlining an otherwise time-consuming process.

It now employs 200,000 and rakes in $12bn in annual revenues. 

Infosys and its peers represented a new breed of savvy, global-facing companies that avoided the less-transparent dealings associated with many of India’s established, family-owned businesses. Mr Murthy also won praise for championing “compassionate capitalism” in a country with stark inequality. 

That allure — and the premium it helped add to the outsourcer’s stock — has been dealt yet another blow. Analysts are not forecasting a swift recovery.

In letters penned to the company’s board and the SEC in late September and early October, the whistleblowers alleged that top executives oversaw a string of “distributing unethical practices,” and say they have emails and voice recordings to support their claims. 

These include efforts to boost short-term financial results through aggressive and irregular accounting, pressure not to reveal key information to auditors and the board and the sidelining of employees who disagreed, according to the complaint, copy of which was seen by the Financial Times.

“Several billion dollar deals of last few quarters have nil margin,” the complaint says.

The writers — calling themselves “ethical employees” — also took issue with Mr Parekh’s alleged use of company money to fund personal trips between Mumbai and Bangalore.

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The accusations sparked an outcry when they surfaced in Indian media this week, raising questions as to why Mr Nilekani and the board had not made the allegations public sooner.

After a rout in its US-listed shares on Monday — India’s stock market was closed because of local elections — Mr Nilekani put out a statement the next day reassuring investors that the company had appointed a law firm to investigate and referred the claims to its board and auditors. 

“These complaints are being dealt with in an objective manner,” he said, adding that Mr Parekh would be recused from the investigation to ensure its independence. 

On Thursday, Infosys revealed that the SEC had launched its probe into the complaints and it was facing a class-action lawsuit, prompting further weakness in its stock. “The company intends to defend itself vigorously in such a lawsuit,” Infosys said.

Mr Nilekani and a spokeswoman said the company would have no further comment. Mr Parekh could not be reached for comment separately. 

One shareholder expressed dismay that the board didn’t publicly respond faster, particularly given that the personnel changes of 2017 were intended in part to reassure investors that governance concerns would not be repeated. 

“You’ve got to take some extreme step because the allegation is so fundamental,” the shareholder said. “The standard expected for Infosys is higher. That’s where the premium comes from . . . Fundamentally it’s trust that has been impacted.” 

Analysts said the allegations risked cementing a shift in investor preference toward shares of Tata Consultancy Services, the company’s main outsourcing rival. Tata Consultancy shares have risen almost 2 per cent this week.

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The concerns are “unlikely to be resolved near term,” said analysts at Nomura. “The fact that it comes from its own employees raises serious questions on the matter.” 

The renewed anxiety over governance comes at a time when India’s outsourcers are under pressure to develop nimbler, digitally-savvy models that excel in growth areas like artificial intelligence and connected devices, rather than their traditional, labour-intensive model. 

But analysts say what might previously have been a contained dispute for Infosys has acquired new gravity with the looming SEC probe. 

“There are too many battles to be fought at the same time,” Mr Gogia said of Greyhound Research.

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