Infosys : Whistleblower Complaint , Stock Price & Our View

October 22, 2019

On Sept 20th , 2019 there was a whistleblower compliant filed with Board of Directors of the company and the same with evidence was sent to SEC under whistleblower policy on October 3rd. 

 

This is second time in span of three years that the whistleblower compliant is filled against the current CEO. In 2017 , complaint for filled against that time CEO Vishal Sikka alleging that Panaya acquisition was flawed and post such event he was removed from the post. 

 

But this time the allegations are much more serious and the evidence is much stronger if proven genuine.And it would impact the company valuations in short and medium term especially post last two quarter results were better in terms of profitability and best in terms of new deal signing. 

 

Allegations Charged in the complaint : 

  • Forced to not recognise reversal of revenue or defer the expenditure recognition to inflate the profitability and help push the stock price up.

  • New Large Deal signing are not done according to procedure laid down and have nil margin.

  • Undermining the Board of Directors and not providing them with full details of the deal signing.

  • CEO Personal expenses are being paid by the company expenses.

  • Not fully reporting facts under the 20F and annual report norms.

These allegations as per the letter are backed by audio and email evidences that have been submitted to the Board and SEC. 

 

Copy of Letter to Board & SEC : Click Here

 

Stock OI Position :

 

 

The compliant was filed on 20th September 2019 with Board of Directors and there was big selloff with volume and large Put build up on 23rd -25th September 2019. Though when the complaint was filed with SEC there was not much of reaction post that but there was increase in Short positions in F&O especially as of Friday close 740 put has largest Open Interest. 

 

 

Our View : 

 

We take these allegations and complaint very seriously as it second time such an incident has occurred in past three years. Especially when the company has been known for its corporate governance standards when promotes were in management role. 

 

First , New deal signing was one of the positive trigger that was making investors shift from other large cap IT firm to Infosys as it provides future visibility and proves that the investment phase that lasted 18 months is now showing results.

 

Second biggest allegation is the going against the accounting practices to show higher profit that puts another question mark over previous two quarters reported that were better than peers and resulted in rally in stock price.

 

Last,  whether theres is some connection of this with resignation of Deputy CFO post results who had spent 14 years in the company. 

 

We have downgraded the company from HOLD to SELL and would review rating only once the matter is formally completed.

 

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