The US regulator, the Securities Exchange Commission, has sprung to action just a few days after the whistleblower complaint against Infosys came in alleging complaints of profit inflation, fraudulent accounting, irregularities in large deals and employees being asked to not recognise finance costs. CNBC TV18 learns from sources that SEC has sought critical data and information pertaining to the allegations made in the complaint.

Shares of the IT services major had gotten pummeled in trade on October 22 on the back of these allegations with the scrip falling 16.5 percent to close at Rs 640. The sharp fall in the scrip wiped out Rs 53,450 crore from the company's valuation. On October 21, the audit committee retained the law firm of Shardul Amarchand Mangaldas & Co to conduct an independent investigation. Infosys also published a detailed letter by Nandan Nilekani which gave a detailed timeline of events. It outlined that on October 16 the company was made aware of a letter dated October 3, 2019 which was purportedly written to the office of whistleblower protection program, Washington D.C. This letter refers to the September 20, 2019 complaint, and to emails and voice recordings in support of the allegations. The matter was also discussed by the board on October 11. On October 24, Infosys confirmed that SEC had begun a probe into the complaints by the whistleblower. “The company has been in touch with the Securities and Exchange Commission (SEC) regarding the anonymous whistleblower complaints (Anonymous Complaints) and has learnt that the SEC has initiated an investigation into this matter. The company will cooperate with the SEC’s investigation;” Infosys said in its statement.

Audit reports sought

CNBC TV18 learns from sources close to the development that SEC has sought financial statements as well as complete audit reports starting April 2017 till date from Infosys. Two sources familiar with the development confirmed that Infosys was cooperating with all the requirements by SEC and is in the process of submitting the data. Not just the statements, sources add that data and documentation pertaining to deal closures and emails and communications within the finance team and communications between the finance team, management and clients had also been sought.

“As per procedure SEC is collating all the data. It will then examine brokerage and ratings agency reports and review trading data. It will then conduct an informal inquiry and interview witnesses with respect to the investigation. This will include the complainants and the accused along with other people related to the transactions;” said one of the sources familiar with the developments and conversations with SEC. As per SEC norms, the US regulator can compel witnesses by subpoena to testify and produce books, records and other relevant documents, should the need arise. When contacted for a comment on the information by sources, an Infosys spokesperson responded; “We do not have any additional information to share at this point, other than the statement we issued yesterday. Should there be an update on the matter, we shall inform you.” An analyst tracking Infosys indicated that while the company was conducting its own investigation along with the external legal team of Shardul Amarchand Mangaldas & Co, it will have to heavily reply on SEC investigation as well.

Sebi seeks clarification

What happens after SEC investigation is complete? Following an investigation, SEC staff present their findings to the Commission for its review. The Commission can then authorise the staff to file a case in federal court or bring an administrative action. In many cases, the Commission and the party charged decide to settle a matter without trial.

Simultaneously, the Securities and Exchange Board of India (Sebi) has also sought clarification from Infosys. In its statement yesterday, Infosys had said; “Securities and Exchange Board of India (Sebi) has requested additional information from the company concerning the anonymous complaints. The company will provide the information as per Sebi’s request. The company is also aware of a securities class action lawsuit that has been filed against the company in federal court in the United States based on the generalised allegations in the anonymous complaints. The company intends to defend itself vigorously in such a lawsuit.”