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For Whom The Whistle Blows?

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For Whom The Whistle Blows?
Dr. VK Vijaykumar - 12 November 2019

Whistle blowing is now accepted as a necessary and desirable action for improving standards of corporate governance. It has universal relevance; and is eminently desirable in economies where corporate governance standards are low. Whistle blowing has succeeded in exposing corporate wrongdoings all over the world. In 2002, the Time Magazine named Cynthia Cooper of WorldCom and Sherron Watkins of Enron as ‘Persons of the Year’ for their well recognised and much appreciated whistle blowing, which exposed wrong doings in the respective companies. In India, whistle blowers have exposed wrong doings in prominent companies like Ranbaxy and ICICI Bank, setting standards worthy of emulation. Whistle blowers are protected by law to ensure that they are not punished by the high and mighty.

While whistle blowing has to be encouraged and whistleblowers protected, it is important to understand that well-meaning legislation also can have unintended undesirable consequences. Hard-won reputation, built over years, can be impacted, though temporarily, and investors may incur huge financial loss from an unjustified bear hammering in the stock. Also, sharp correction in stock price can turn out to be an opportunity for discerning investors.

The recent whistle blowing by the “ethical employees” of Infosys has aroused much discussion in corporate and investment circles. The whistleblower group accused Infosys of corporate mis-governance, which, according to them, included improper revenue recognition, misuse of CEO’s travel privileges and low to zero margin large deals. Infosys has to answer allegations raised by the whistleblowers. But prima-facie some allegations like the CEO’s travel privileges being misused appear trivial. Also, winning large deals at low margins do not appear to be a violation of corporate governance norms. It is normal for companies to opt for low-margin deals during business down-cycles or for building healthier and profitable long-term business relationships. However, allegations of aggressive revenue recognition policies and related accounting need to be looked into.

While the jury is still out on whether the iconic company has erred, it is also important to investigate into the possibility of unethical practice to make a quick buck in the market. A specific 740 November put option in Infosys stock has come under the scanner, where premium shot up from Rs 17-130. This calls for detailed investigation.

Message from the market

The Infy stock crashed 16.2 per cent on NSE when the news broke on October 28, wiping out Rs 53,000 Crore in market cap. It is evident that punters who bought put options in the stock and made a killing when the premium on November Infy put option skyrocketed from Rs 17-130.

Subsequently, as some clarity emerged on the allegations, the stock has climbed back around 15 per cent from the lows. Is the huge delivery buying seen in the stock a vote of confidence in the company? Only time will tell. But the market appears optimistic.

The author is the Chief Investment Strategist at Geojit Financial Services

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