Infosys ADR holders complain to Sebi

Legal experts fear such shareholder activism could turn into a class-action suit against Infosys

Investors of Infosys’ American Depository Receipts (ADR) have written to Indian markets regulator Securities and Exchange Board of India (Sebi), complaining about the role of founders in criticising the decisions taken by the board of directors. The ADR holders alleged that this unwarranted criticism had caused them significant losses. 

Shares of Infosys fell 9.6 per cent in the domestic market on Friday and another 5.4 per cent on Monday, while the ADR was down 7.2 per cent on Friday and was trading 2.5 per cent lower on Monday at 7:45 PM IST. 

This fall was triggered by Vishal Sikka’s resignation as the company’s MD & CEO on Friday. Sources said the ADR holders in their letter blamed excessive interference by the company’s founding members for Sikka's exit. This letter is a part of the representations that the ADR holders made before three US law firms, which are evaluating a class-action suit against Infosys. 

The US law firms — which include Pomerantz LLP, Bronstein, Gewirtz & Grossman and Rosen Law — said they were investigating potential claims on behalf of shareholders over “materially misleading business information”. Rosen Law, which said it represented investors from across the world, highlighted Sikka’s claim that criticism by Infosys’ founders was a reason for his resignation.

“These investors’ complaints can be probed only by the US Securities and Exchange Commission (SEC). However, if SEC seeks any specific information, we will share it with the US regulator,” a Sebi source said. An email to the Sebi spokesperson went unanswered. 

Legal experts fear such shareholder activism could translate into a full-blown class-action suit against the Bengaluru-based company, which is also the first Indian firm to list its ADRs. “Infosys ADR is listed in the US, where jurisdiction exists for shareholders to file a lawsuit. Even in India, investors could file a class-action suit against Infosys,” said a legal expert. 

Interestingly, Sebi had recently closed the preliminary probe against the information technology major over allegations of corporate governance violations. Earlier this year, an Infosys whistle-blower had written to Sebi, alleging corporate governance lapses by Sikka and other board members.

The regulator concluded that requisite procedures and disclosures were in place during the acquisition of Panaya and in the severance payout to former chief financial officer Rajiv Bansal. The probe did not come across any corporate governance violations by the Infosys management. 

Sources said Sebi had relied on reports of the audit and remuneration committee of Infosys, which it had sought soon after the allegation was made.

The whistle-blower, in a letter to Sebi and the US SEC, had alleged Infosys had overpaid for the acquisition of Israeli firm Panaya. The letter also raised the issue of the severance payment to Bansal. Similar charges were made by Infosys founder N R Narayana Murthy who attacked the Infosys board for failing on corporate governance norms.