Why Corporate Governance Concerns At Infosys Matter To Mutual Fund Investors - Outside View by PersonalFN

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Why Corporate Governance Concerns At Infosys Matter To Mutual Fund Investors
Oct 31, 2019

Infosys, one of India's largest IT company (known as the bellwether for the industry), is facing the heat for alleged corporate governance lapses.

As per media reports, a whistleblower group in the month of September wrote to Infosys' Board of Directors and the United States Securities and Exchange Commission (SEC) in regard to unethical practices by CEO Salil Parekh and CFO Nilanjan Roy.

The allegations mention that the reviews and approvals for large deals were bypassed and that many of the deals have negligible margin. Employees were instructed not to share information of the large deal with the auditors. Further, employees were asked to make wrong assumptions to improve near-term profitability.

Following the allegations, the shares of Infosys witnessed its biggest single day drop in the last six years on October 22, 2019, wiping out crores of investors' wealth.

Graph: Infosys share price movement in the last one year

In reply to allegations, the company in a statement said that the matter has been placed before the audit committee as per the company's practice and will be dealt with in accordance with the company's whistle-blower policy. Both the CEO and CFO were recused from these investigations to ensure independence.

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SEBI and SEC have started probe against Infosys over the allegations. SEBI will also examine possible insider trading in the company' securities.

This isn't the first time that a whistle-blower has raised corporate governance issue at the company. In 2017, a whistle-blower alleged irregularities in the company's acquisition deal of Israeli software firm, Panaya.

The company's high compensation package to the then CEO Vishal Sikka and hefty severance packages to former CFO Rajiv Bansal and former Chief Compliance Officer David Kennedy was also under the scanner.

In the following year, the whistle-blower wrote to SEBI questioning the company's acquisition of Panaya and Skava and then putting it up for sale in just three years at a reduced valuation.

Chairman Nandan Nilkeni gave a clean chit to the deal and said that there was no merit in the allegations of the wrongdoings. However, the recent complaint has resurrected the issues in corporate governance and smudged the company's reputation for ethical practices. Infosys saw many of its top-level executives quitting recently, which further intensifies the issues right now.

If the allegation by the whistle-blower turns out to be true, the implications will be a major financial concern because many mutual fund schemes have exposure to this bluechip stock.

As of September 30, 2019, mutual funds had total exposure of 44,258 crore in Infosys. Most mutual funds houses hold stake of 1-2% of the total AUM in the company.

Table: Fund houses with highest exposure to Infosys in terms of market value
AMC Market Value (Cr.) % of total AUM
HDFC Asset Management Company Limited 9,638 2.57
SBI Funds Management Private Limited 8,419 2.65
ICICI Prudential Asset Management Company Limited 5,788 1.69
UTI Asset Management Company Private Limited 3,696 2.53
Aditya Birla Sun Life AMC Limited 2,800 1.15
Nippon India Life Asset Management Limited 2,220 1.14
Kotak Mahindra Asset Management Company Limited 2,041 1.25
Franklin Templeton Asset Management (India) Private Limited 1,546 1.23
Axis Asset Management Company Ltd. 1,349 1.27
Motilal Oswal Asset Management Company Limited 983 4.93
Data as on September 30, 2019
(Source: ACE MF)

Top fund houses like HDFC Asset Management Company, SBI Funds Management, ICICI Prudential Asset Management Company have the highest exposure to the company in terms of market value across various schemes. Infosys forms part of the top holdings for many equity schemes because of its remarkable growth over the years and positive outlook. Besides, Technology sector funds have high exposure to the company.

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It would be interesting to see how mutual funds have approached the stock in October. That is, whether they have gone underweight after this news blew full in the public domain. Hence, I'll be closely tracking the developments, digging into October 2019 portfolio data of mutual funds and evaluating the impact it would have on your mutual funds.

Infosys has for long been known for ethical corporate governance practices. Investors will have to wait for the audit committee to complete investigation and handover their reports. Till then it will be better to avoid any knee-jerk reaction. But since the allegations are serious, investors expect the company to clarify the whistle-blower's accusations as soon as possible.

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Author: Divya Grover

This article first appeared on PersonalFN here.

PersonalFN is a Mumbai based personal finance firm offering Financial Planning and Mutual Fund Research services.

Disclaimer:

The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

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