Infy ADR slumps 16% in opening trade at Nasdaq

Our Bureau Chennai | Updated on October 28, 2019

But Equirus Capital says 'whistleblower' has mixed the accounting norms with business decisions

In an immediate reaction to the whistleblower allegations, the American Depository Receiptis of Infosys slumped 16 per cent at Nasdaq in opening trade on Monday. The ADRs are ruling at $8.9, down 15.84 per cent. On Friday, the ADRs closed at $10.57.

Shares of Infoys on the BSE on Friday closed at Rs 767.75. Domestic stock markets are closed today due to Assembly elections in Maharashtra and resume trading on Tuesday.

Ethical Employees, a whistleblower group, has allegedly complained to the US Securities and Exchange Commission and the Infosys Board that CEO Salil Parekh was indulging in "unethical practices” to boost short-term revenues and profits.


Infosys, in a statement, said: “The whistleblower complaint has been placed before the Audit Committee as per the Company’s practice and will be dealt with in accordance with the Company’s whistleblowers policy.”

Podcast | Infosys whistleblower: What next for Salil Parekh?

In 2017 and 2018, a previous whistleblower had raised questions over corporate governance issues about Infosys. Indian regulator SEBI had even set up a probe committee to find out whether the allegations were true or not.

Harit Shah, Research Analyst, Reliance Securities, said: It's very serious news indeed. This equates to a corporate governance issue.

"Really disappointing that a company that has long been viewed as a "poster boy" of corporate governance in India has seemingly fallen to such levels. It calls into severe question board-level processes at the IT major, which is even more disappointing given that when founder Nandan Nilekani was brought back on the board, his specific focus was to ensure high corporate governance standards post the Vishal Sikka fiasco," he said in a statement.

"While we await developments on the board investigation, given that it is so widely held, it is very likely that some investors will vote with their feet and sell at least some of their holdings. The market is very unforgiving of companies that have corporate governance issues and while it would not be fair to directly jump to conclusions, this issue appears quite ugly at least on the surface," he further added.


 Time to buy?

However, Equirus Capital said: "We do not see any impact on near-term financials. A slowdown in 3Q due to higher-than-anticipated furloughs could impact earnings and remains a key risk".

Equirus Capital further said: "We believe the whistleblower has mixed the accounting norms with business decisions. Large deal wins could be margin dilutive in the initial phase or might require upfront investment from vendors. In our view, this may be considered as customer acquisition cost. We like management’s revenue growth focus even if it is at the cost of margins initially. Gaining wallet share cements the company’s position with vendors, and over a period provides a necessary cost rationalisation lever (lower SG&A to name one) to recoup margins".

Any sharp fall in the share price post the allegations provides a good opportunity to invest, Eqirus said.

Published on October 21, 2019

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