BANGALORE: Infosys, once the gold standard for corporate governance in India, now finds itself in a list of companies that a leading brokerage firm categorizes as the ‘Underbelly of Indian IT’.

The firm, Ambit Capital, notes several developments in recent times that have lowered governance standards at Infosys, and says the market is yet to discount these appropriately.

Two of those developments have been noted by many in the past few months. These include co-founder N R Narayana Murthy’s return to the helm as executive chairman last June “despite the firm’s well-articulated policy of executives retiring at the age of 60 years”.

“More surprising was (son) Rohan Murty’s entry into Infosys as NRN’s executive assistant. Whilst this is a position of power, but not of control, the manner in which Rohan Murty was brought in raised eyebrows to put it mildly,” Ankur Rudra and Nitin Jain of Ambit Capital said in the report. “All founders have time and again mentioned about not letting family manage the business,” the report noted.

Ambit then goes on to note two other discomforting developments. Infosys promoters’ representation on the board is now significantly higher relative to their shareholding in the company. The three promoters who are also board members — N R Narayana Murthy, S D Shibulal and Kris Gopalakrishanan — collectively hold 10% stake in the company and they represent 23% of the voting rights on the board.

TCS has a promoter shareholding of 73.9%, while the promoter representation on the board is 9.1%. Azim Premji promoted Wipro has promoter holding of 73.5% and a promoter representation of 7.7%.

“With the highest promoter representation and the lowest proportion of independent directors on the board, Infosys’ board independence appears to be weakest among the tier-1 firms,” the report says. The $8 billion IT company has 13 board members, including 7 independent directors.

However, this could change next year, when Shibulal and Gopalakrishnan retire. Murthy has said the company would effect changes to its board in the next 12 months. Shriram Subramanian, founder of corporate governance research firm InGovern Research Services, also notes that promoter representation is a tricky thing. “They wield a higher degree of influence and control in decision-making. In the case of TCS, 5 out of 11 are non-independent directors and they may influence decisions,” he said.

Ambit also notes that the pattern in Infosys’ revenue guidance over the last three years has caused extreme volatility in the share price.

Ambit’s report categorizes companies as ugly (Geodesic, Educomp, Financial Technologies), bad (Rolta, MCX) and the not so good (Tech Mahindra, Infosys, KPIT Technologies).

The report said that Indian IT firms have used a variety of tricks to window dress their accounts, ranging from recognizing cashless revenues (Geodesic), recognizing seemingly non-existent revenues (Geodesic, Rolta and MCX), accelerated revenue recognition (Educomp), margin management (Geodesic, Rolta and KPIT), inflated balance sheet (Rolta), cash flow management (Rolta and Geodesic), and sugar-coating accounts (Tech Mahindra).