Infosys share buyback: Uncomfortable questions over announcement timing; will Sebi investigate?

New Delhi: Markets regulator SEBI has begun a “routine” investigation into the Infosys stock movement following the resignation of CEO & MD Vishal Sikka and the share buyback announcement, which came the very next day. Sikka announced his shock resignation on Friday, plunging the scrip to multi-year lows over uncertainty on near-term operation metrics, leadership challenges and continued tussle between the board of directors and the founders. And the very next day, the company’s board went ahead and announced the planned share buyback, at a price which seemed quite attractive after the Friday bloodbath on the street. Now, questions are being raised on the timing of both these events. Speaking to Firstpost, proxy advisory firm Stakeholders Empowerment Services’ MD, J N Gupta, made two pertinent points about the entire saga of resignation and buyback: 1) Why did Vishal Sikka quit just a day-and-a-half before the buyback announcement was scheduled to be made? It is to be noted that the date for a meeting of the board of directors was already known. 2) Sikka was considering quitting for some time (as we got to know from his blog on Friday) and “he would have had a general idea about the intended buyback price”. This is pertinent especially since Gupta says Sikka knew that both, the announcement of his exit and the buyback price, are pieces of price sensitive information. This report in The Times of India hints at a Sebi probe into the entire Inofsys episode since Friday. It also quotes Anil Singhvi of Ican Investment saying an enquiry is in order. “The board announced plans to go ahead with buyback when they knew the CEO was leaving. Investors bought heavily into the counter on Thursday (stock was up 4 percent) only to realise the next day Sikka was leaving (stock lost more than 10 percent). This massive erosion of wealth alone is sufficient for examination. Why make a filing on a buyback plan when the board was besieged by a significant corporate development?” Singhvi said. Perhaps, the Sebi investigation will look into this matter keeping these queries in mind. [caption id=“attachment_3960235” align=“alignleft” width=“380”]  Reuters[/caption] Shriram Subramanian, MD of another shareholder advisory firm InGovern, said the buyback price is an average of the scrip price for the last three months, adding “the board could have been more discerning in going ahead with the buyback decision just a day after the resignation of the CEO & MD. This leads to the perception that the company wanted to support the stock price by putting out positive news”. It is another matter that despite the buyback price becoming suddenly quite attractive, the Infosys investor seems to have scant faith in the company and the scrip was hammered on Monday too, the first trading day after the buyback announcement. Why did the Infosys scrip tank on Friday after Sikka’s resignation became public? Analysts at brokerage ICICI Securities noted with concern that unlike peers, Infosys’ fortunes were linked to just one person, something they have not seen in other IT companies. “No other company within our coverage universe, barring Infosys, has had its fortunes linked to just one person. Tata Consultancy Services (TCS), Wipro and HCL Tech (HCLT) have seen their CEOs change over the past two years with the transitions being seamless, having limited impact on employee morale and customer perception. However, we expect Vishal Sikka’s exit from Infosys to have a definite impact on high performer employee attrition, pace of next generation capability creation, investments in software and products, and in the organisation’s risk taking ability. High performers at Infosys identified more with Sikka in recent times rather than Infosys as an institution, and may now look at avenues outside the company (unlike TCS, for example, where employees have always prided themselves in working for an iconic institution more than anything else). Since the board desires next CEO with an innate understanding of the company’s culture and the services industry, and given that the friction with founders seems far from over, the likelihood of the next CEO being an outsider becomes that much lesser.” With the company plunging into crisis of uncertainty and hoping for the share buyback announcement to be a savior, will things get back to normal anytime soon? This article in Moneycontrol.com suggests that the founders – whose allegations of wrongdoing and falling corporate governance standards within Infosys forced Sikka to quit – will benefit at all from this turn of events. It says if founders also submit their shares in the buyback, reduce their stake then their stand of fighting for the long-term good of Infosys would sound hollow. “The promoters would be making money by selling their stake at a huge premium over the current market price. This is unlikely to go down well with investors as many blame N R Narayana Murthy for Sikka’s exit and the resultant fall in Infosys’ share price. Why should the promoters sell their share at a time when Sikka is no longer at the helm? The promoters need to put their money where their mouth was,” the article said. On the other hand, if founders do not submit their shares in the buyback offer, their stake in the company would increase subsequently. “Higher promoter stake would be interpreted as higher meddling in the affairs of the company, something that would mean that the status quo would continue and no real decisive policy measures would be taken,” the Moneycontrol article said. Many brokerages have already given a thumbs down signal to the Infosys developments, downgrading the stock over near term operational uncertainties and vacuum at the top.