Infosys has managed to remain in the news over the last five years for all the wrong reasons. In the latest episode, a whistleblower has leveled allegations on the CEO and CFO of concealing costs that would have realistically dented profits. While the complaint has been filed with SEBI and the SEC in the US, it appears to be a clear case of much ado about nothing. Here is why.
Most charges are frivolous
Broadly, there are two sets of charges leveled by the whistleblower. Firstly, there are charges about the behavior of the CEO and the standards of decorum maintained. Most global companies have their own internal methodology for dealing with such issues and are closed out with an apology or a written note to the offender. The second charge is more serious and pertains to the quality of earnings shown by the company. According to the whistleblower, the CFO and the CEO had colluded to underplay the expenses and overplay the profits so as to enhance valuations for the stock. That allegation becomes a lot more significant considering that Infosys has been reporting better numbers and also upping the guidance. However, this is an issue for the audit committee to deliberate over and take a call appropriately. Of course, this could be a serious charge considering that Infosys has traditionally prided on setting the highest benchmarks of data disclosure and corporate governance standards.
What about class action suits?
One of the reasons that the stock fell sharply on the day of this complaint was that there were major fears of a class action suit against the company. Such cases are permitted to be filed by third parties where the larger public interest has been jeopardized. It is hard to imagine that a fall in equity value due to an internal issue could actually be subject of a class action suit. In the past, lawyers have taken up more serious issues pertaining to environment and public health for a class action suit and that was justified. Whether equity risk comes under class action suit is highly debatable. After all, if investors do not want to take the price risk of equities, better stick to good old debt.
Larger issues for Infosys
The class action suit does not appear to be a very real risk for the company. However, there are two other issues for Infosys to focus on. Firstly, Infosys has added a large number of US employees and that will work to their advantage. But it also opens them for scrutiny. But the bigger worry for the company will be the perception in the markets. Since 2012, Infosys has lagged behind TCS on margins, employee retention and also on valuation matrices. That had just started to turn around in the last few quarters. Infosys must ensure that this does not become another reason for the market to re-rate the stock lower! ©