NEW DELHI/BENGALURU (Reuters) - India’s No.2 software services exporter, Infosys Ltd (INFY.NS), is probing whistleblower complaints that its top two executives engaged in “unethical practices” to boost short-term revenue and profit, sending its shares down 16% on Tuesday.
Chief Executive Salil Parekh, who took charge in 2018, has bypassed reviews and approvals for large deals for fear of reduced profits having a negative impact on its shares, the letter signed by “ethical employees” said.
“Several billion dollar deals of last few quarters have nil margin,” said the Sept. 20 letter, a copy of which was reviewed by Reuters, which implies the company did not actually profit from the deals.
Bengaluru-headquartered Infosys, considered India’s IT bellwether, also did not take into account expenses such as visa costs to boost profit, while it was pressured not to recognize reversals of a $50 million upfront payment in a contract, which is against accounting practices.
“CEO is bypassing reviews and approvals and instructing sales (team) not to send mails for approval. He directs them to make wrong assumptions to show margins,” the letter said, adding that Chief Financial Officer Nilanjan Roy prevents employees from highlighting issues around large deals in presentations to the company’s board.
Reuters could not independently verify claims made in the letter.
Parekh did not respond to Reuters’ request for a comment.
Infosys Chairman Nandan Nilekani said in a statement on Tuesday that the complaints were placed before the audit committee and the non-executive members of the board.
Parekh and CFO Roy have been recused from the matter to ensure an independent investigation, said Nilekani, who is credited for growing Infosys’ annual revenue by four-fold to $2 billion during his 2002-2007 tenure as CEO.
The allegations could start a fresh storm at Infosys, which just two years ago endured a shake-up that saw its then CEO Vishal Sikka leave after a public battle with founders.
Shares of Infosys fell as much as 16% on Tuesday, its biggest intraday percentage drop since April 2013. The fall wiped out 470 billion rupees ($6.6 billion) in market capitalization, which was at 2.8 trillion rupees as of 1220 local time (0650 GMT).
“Infosys is the blue-eyed boy as far as corporate governance is concerned... two complaints in two years could shake investor confidence, at least temporarily,” said Deepak Jasani, head of retail research at HDFC Securities.
The accusations come days after Infosys raised its full-year revenue guidance on upbeat client demand and said it signed $2.8 billion worth of large deals in the September quarter, helping margin grow by 120 basis points from the previous quarter.
Infosys, whose more than 1,300 clients include Intel Corp (INTC.O) and Verizon Communications Inc (VZ.N), also reported a forecast-beating operating profit margin of 21.7%, or 100 basis points higher than analysts’ average estimate by Refinitiv.
Another of the complaints "largely deals with allegations relating to the CEO's international travel to the U.S. and Mumbai," Nilekani added. (bit.ly/2P3YbDv)
The Economic Times first reported the details of the letter on Monday. (bit.ly/2o5UWAd)
The audit committee has retained law firm Shardul Amarchand Mangaldas to conduct an independent investigation, and the company’s board will take appropriate steps based on the outcome of the investigation, the company said.
Reporting by Sankalp Phartiyal in New Delhi and Chris Thomas in Bengaluru; additional reporting by Chandini Monnappa; Editing by Rashmi Aich, Miyoung Kim and Christian Schmollinger