Infosys Forgot Founder’s Mantra: When In Doubt, Disclose

Twenty-one days passed before Infosys Ltd. informed shareholders of two whistleblower letters alleging unethical practices at the company.

It can be nobody’s case that all whistleblower complaints be publicly disclosed. Last financial year Wipro Ltd. received over 1,400 whistleblower complaints. State Bank of India received over a 1,000 and HDFC Bank 56. Disclosing all of them would be confusing for shareholders and chaotic for stock prices.

The law doesn’t require it either. Both company law and securities regulation require companies to put in place a vigil or whistleblower mechanism but neither mandate the disclosure of every complaint.

What the law does mandate is disclosure of material events or information. The Securities and Exchange Board of India regulation doesn’t define ‘material’. Instead it lists 16 events or information that are mandatory to disclose timely, say financial results or acquisitions, and the rest it leaves up to companies to frame a policy describing what they would consider material. For that SEBI provides guiding criteria— for instance an event or information would be considered ‘material’ if its omission is likely to result in significant market reaction when it came to light at a later date.

Which brings us to the question central of this column...

After all, the complaints alleged unethical business practices and raised doubts regarding financial reporting and accounting practices. That’s serious stuff.

Yes, on the face of it. But just because a whistleblower letter may purport to discuss serious items that doesn’t mean it is material.

In fact, it would be reckless for a company to disclose all seemingly serious accusations without checking their veracity. Or else it could very well become a tool in the hands of certain interest groups, such as short-sellers.

Thus, it would be incumbent on Infosys to have prima facie determined the seriousness of the allegations before deciding whether they deserved investigation and disclosure. It would have done this by looking at, among other things:

• the facts claimed in the letters—do they suggest genuine information;
• the nature of transactions highlighted—big or small, routine or non routine;
• the executives against whom the allegations have been made—the higher up the more serious;
• and the credentials of the whistleblower, though in this case they are anonymous.

Basis this, the audit committee, as per SEBI regulations, would have determined whether the complaint deserves further investigation. And, if it does deserve investigation then it likely deserves disclosure, right?

That’s where Infosys has caught itself in a bind.

Were The Complaints ‘Material’?

By the company’s own admission, the two whistleblower complaints were received by a board member on Sept. 30 and placed before the board’s audit committee on Oct. 10. The board held a scheduled meeting on Oct. 11 to consider quarterly earnings.

And as per Chairman Nandan Nilekani’s statement, “Post the board meeting of October 11, 2019 the audit committee began consultation with the independent internal auditors (EY) on terms of reference for their prima facie investigation”.

Surely, terms of reference are only discussed after a decision to investigate has been taken. Most likely on Oct. 11 itself, going by Nilekani’s statement.

A reading of the company’s ‘materiality for disclosures’ policy suggests that a whistleblower complaint that deserves to be investigated by an external law firm deserves to be disclosed to shareholders as well.

Infosys defines ‘material’ as information that a reasonable investor would consider in making a decision to buy, sell or hold a security or where such information is likely to have a significant effect on the market price of the security. That’s text book stuff.

But the policy goes further to list some examples of information that would normally be regarded as ‘material’, including...

“Positive or negative developments in outstanding litigation, investigations or regulatory matters with significant impact on financial results.”

Inferring from that, if a development in an investigation is considered by the company to be material, then wouldn’t the commissioning of an investigation also qualify as material?

Why Then Did Infosys Delay Disclosure?

So, while the receipt of whistleblower complaints may not be an event material enough to disclose, and rightly so, that Infosys thought them to be material enough to investigate should have triggered a disclosure. On or near Oct. 11 itself.

Infosys may argue that it was waiting to appoint an external investigator before making a disclosure. But the company’s first public statement, when news of the whistleblower complaints broke on Oct. 21, made no mention of that. It was a terse three-line statement that said the complaints had been placed before the audit committee. No suggestion whatsoever that the company was seeking to engage an external investigator.

It’s only in Nilekani’s statement on Oct. 22 did the company mention that law firm Shardul Amarchand Mangaldas & Co had been appointed to investigate the complaints. And that the appointment was made on Oct. 21. The same day the media reported on the complaints.

To external observers it would seem that Infosys was not prepared to disclose the whistleblower letters or the investigation, until forced to do so by the media reports and a share price hit.

This exposes the board and the audit committee members to serious liability, more than one lawyer opined. The nature of the allegations are serious enough to warrant “immediate disclosure”, one emphasised.

Now SEBI is investigating the disclosure delay, the U.S. Securities and Exchange Commission is investigating the whistleblower complaints and the Infosys stock has lost close to a fifth of its value.

Maybe the company intended disclosure but was unsure of when to disclose the complaints.

But then it should have heeded its founder NR Narayana Murthy’s mantra: When in doubt, disclose.

Menaka Doshi is Managing Editor at BloombergQuint.