Infy ADR crashes 14% after the whistleblower complaint - ETtech
Infosys' ADRs opened 14% down on the NYSE on Monday as investors reacted to concerns raised in a whistleblower letter that alleged "unethical steps" by the company to boost short-term revenue and profits to drive the stock higher.
The issue could further impact how investors view the company and call into question its growth metrics, said analysts.
Infosys ADRs fell 16% in premarket trade. They had slumped to $8.93 apiece in morning trade, according to data on Market-Watch. The 52-week low for the ADRs is $8.85. At 11pm India time, the ADRs were down 12%.
Complaints placed before Audit panel: Infy
Recent trader activity in the local markets with regard to Infosys derivatives has raised eyebrows, given the unravelling of the whistleblower complaint over the weekend.
Some market participants flagged as unusual the high buildup of open interest of over 1.8 million shares - higher than any put strike in October - expiring on November 28. The November put had zero open interest till September 24. A day later, it saw open interest for more than 1.8 million shares. Indian markets were shut on Monday on account of assembly polls in Maharashtra. Infosys stock on local exchanges "could fall 8.7-11.3%", said Rajesh Palviya, derivatives head, Axis Securities.
ET had reported on Monday that a group calling itself "ethical employees" had filed a whistleblower statement with the Infosys board and the US Securities & Exchange Commission, alleging that the company's top managers were bending rules with regard to accounting of revenue from large deals and how profitable these projects would be. "Very serious news indeed. This equates to a corporate governance issue. Deputy CFO has also quit. This in itself is an indirect admission that something is rotten," said Reliance Securities analyst Harit Shah.
Last week, deputy CFO Jayesh Sanghrajka had resigned from the Bengaluru-headquartered company, which announced quarterly results on October 11. "Nobody expected this news (the whistleblower complaint). This has soured sentiment on the counter," said Chandan Taparia, a derivatives analyst at Motilal Oswal Financial Services. "I have been recommending selling calls at higher levels." The US SEC declined to comment on ET's query on whether it would look into the whistleblowers' allegations.
On Monday, Infosys told Indian stock exchanges that it received whistleblower complaints and placed them before its audit committee, saying the complaints would be dealt with "in accordance with the company's whistleblower policy".Accounting methods
During an earnings call earlier this month, analysts had questioned Infosys' accounting methods. JP Morgan analyst Viju George had asked CFO Nilanjan Roy if there was a "change in policy" with regard to the way revenue is recognised in the firm's books.
In response, Roy had said there was no change in policy. "This is a combination of a few clients where you have a difference in the billing milestones versus the revenue recognition," he had said.
The whistleblower letter alleged that revenue recognition was being forced in large deals, such as the firm's JV in Japan and the acquisition of European mortgage servicing platform Stater. Meanwhile, people directly aware of the developments within the company told ET that "it is obvious that the (Infosys) board received the letter and process has (been) followed". "It is a matter that came up earlier, before the (quarterly) results were announced. The audit committee knew about it. There is nothing material," said a second person.
Corporate governance experts feel Infosys' audit committee needs to investigate the allegations quickly and give a clear picture to the investors. "... the whistleblowers say they have email and voice proofs. The audit committee and board need to act quickly, and investors need (to be given) the true picture," said Shriram Subramanian, founder, institutional shareholder advisory firm InGovern.
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