Concerns Emerge Over Disclosure Norms at Infy
Any special treatment to founders would be a ‘violation’ of norms, say governance experts; Sebi keeping ‘watch’
Jochelle Mendonca, Megha Mandavia & Reena Zachariah
Bengaluru | Mumbai: Infosys’ troubles are raising concerns that it is violating fair disclosure norms and could face an investigation by the Securities and Exchange Board of India (Sebi) about severance pay being used as hush money, say governance experts, a steep climb-down for a company that used to pride itself for its corporate governance.
Infosys’ iconic founder Narayana Murthy has said the amount of money paid to the outgoing CFO has given rise to concerns about whether it is used as ‘hush money’. And even more worrying is the suggestion of special channels being created for conversations between the management, the board and the founders.
Last week, Infosys said it had appointed Cyril Amarchand Mangaldas to formalize a process to receive comments from its promoters and key stakeholders. “The company cannot state that Cyril Amarchand Mangaldas has been appointed to open (a channel of) communication with the founders. If there is any communication, other shareholders would also like to know about it. And they have as much right as the founders to know,” Shriram Subramanian, founder of shareholder advisory firm InGovern, told ET. He added that his was a concern under fair disclosure norms. Foreign portfolio investors own over 39% of Infosys. Mutual funds own another 7.5%. Insurance companies own 11.26%. The promoter group owns under 13%.
“The entire fair disclosure norms are so nuanced that people forget to look into it and pay heed to it. The company is obligated to make disclosures to all shareholders and not just the founders,” Subramanian said.
Subramanian pointed out that Sebi could also take suo moto notice of Murthy’s ‘hush money’ statement.
“We are watching what is happening at Infosys very closely. We are watching out for developments,” a source at Sebi told ET.
Infosys’ founders have publicly stated that governance standards at the company have dropped, that CEO Vishal Sikka’s salary is too high and that they want to add new members to the board, including a co-chairman. Former Infosys executives V Balakrishnan and TV Mohandas Pai have said that board chairman R Seshasayee should step down.
But despite being a founder with an outsized influence, Murthy’s rights are limited.
“His rights are limited to those of a shareholder. He has no right to appoint the head of nomination and remuneration committee (NRC) as that is the job of the board. As a mentor, he can give advice but it is not binding. A father can give advice but it’s up to the son and daughter to follow or not,” said JN Gupta, managing director at proxy advisory firm SES.
The sharing of information with promoters through special channels could also give rise to worries about insider trading. “Murthy cannot be a power centre behind the curtain. Rather than having an under the cover control, let the relationship between the promoters and board be institutionalised. With an undertaking from promoters that they cannot trade in shares,” Gupta said.
Roopa Kudva, independent director at Infosys, said the company was very conscious of disclosure norms and that there was no selective sharing of information. “Cyril Amarchand Mangaldas has been appointed to receive inputs not to share information. They have been appointed to streamline the process of shareholder communication. Infosys is very particular about sharing information selectively so the question about asking the founders to sign a non-trading agreement does not arise,” Kudva told ET.
ET has reported that, so far, the board is backing Seshasayee. ET was also the first to report that OppenheimerFunds, one of Infosys’ largest institutional investors, had asked the board to “contain inappropriate interventions by non-executive promoters”.
Should the board not accede to the founders’ demands, or even bring in a co-chairman, the situation could get even more messy. “If they don’t listen, I think this could go to an extra-ordinary general body meeting,” former Infosys CFO Mohandas Pai told ET.
But getting the vote at the EGM will not be easy. Experts pointed out that though Tata Sons owned 73% of Tata Consultancy Services, about 40% of institutional shareholders voted against the resolution to remove Cyrus Mistry as chairman of the company. Attempts to bring former Infosys executives, close to the founders, to the board may also not be looked at kindly.
“It may backfire for the reasons set out by Oppenheimer – which were couched in unusually strong language. Infy’s significant foreign portfolio investor shareholding may look askance at this practice,” said Ranjit Prakash, chief executive partner at Archeus Law.
The sharing of information with promoters through special channels could also give rise to worries about insider trading