SEBI Begins Probe Into Huge Derivatives Position In Infosys Before The Whistleblower Complaint Became Public

The Securities and Exchange Board of India (SEBI) has initiated an investigation into the buildup of huge derivatives positions in Infosys shares just before whistleblower allegations of accounting malpractices against CEO Salil Parekh and Chief Financial Officer Nilanjan Roy went public.

Allegedly, huge derivatives positions were built up and put positions were accumulated in the November series of Infosys.

The whistleblower complaint which was made to the Infosys management as well as the US Securities and Exchange Commission (SEC) became public on October 21.

The development saw American Depository Receipts (ADRs) of Infosys slump 17%, and more than 16% in India during the immediate few days.

Significantly, the SEBI has chosen to take suo motu cognizance of the whistleblower compliant though it was not made to SEBI itself.

The SEBI is expected to seek the Infosys audit committee findings for any action since the Infosys audit committee is already in the process of examining the whistleblower complaint for its merit.

Incidentally, there were indications that SEBI might seek clarification from the management of Infosys about charges leveled by whistleblowers.

A series of allegations have been leveled by whistleblowers referring to steps taken by CEO Salil Parekh like resorting to unethical practices to boost short-term profit and downsizing expenses by not recognizing visa cost.

In their letter, whistleblowers had claimed, “Critical information is hidden from the auditors and board. In large contracts like Verizon and Intel, joint ventures in Japan, and ABN Amro acquisition revenue recognition matters are forced, which is not as per the accounting standards”.

The letter also mentioned about the management putting immense pressure on them to not recognize reversals of Rs 353 crore of upfront payment in the FDR contract, since it would slash profits for the quarter and negatively affect the company's stock price. Not recognizing reversals of upfront payment in FDR contract was against fair accounting practices, the letter stated.

In a statement on October 21, Infosys had stated that the whistleblower complaint had been placed before the audit committee as per the company's practice.