Advisory firm Institutional Investors Advisory Services (IIAS) has advised investors to vote against a resolution seeking the reappointment of the statutory auditor of technology major Infosys.
Among other things, the company is seeking shareholders' approval for the reappointment of BSR & Co as statutory auditor at its annual general meeting to be held in Bangalore on Saturday. While IIAS is opposed to this resolution, it is in favour of all the other resolutions up for shareholders' approval, including the adoption of accounts, appointment of directors and on executives' compensation.
IIAS calls itself an advisory firm dedicated to providing participants in the Indian market "with independent opinions, research and data on corporate governance issues".
In a report dated June 5, IIAS said the continuation of the auditor for six years and the same partner signing the report for more than three years were events carrying "moderate risk".
According to the report, BSR & Co has been the statutory auditor of Infosys "since at least FY1999". The report says, "Further, as per annual reports, audit partner (Natrajh Ramakrishna) has been the signing partner since FY2007."
"IIAS recommends that the auditor be rotated every six years and the signing partner every three years. Given that BSR & Co has been the statutory auditor for 14 years and the audit partner has been the signing partner for six years, IIAS recommends voting against the resolution."
An Infosys spokesperson refused to comment on the report but said, "We expect our shareholders to exercise their judgment."
Natrajh Ramakrishna, partner, head of audit, India, BSR & Co, said it was unfair to pick a particular firm and the issue had to be addressed in totality.
He declined to comment on the specific observations of the report. Indian laws do not mandate any specific terms for auditors. It is commonplace among most large listed firms to have auditors unchanged even for several decades. Analysts familiar with Infosys say the company has an extremely strong audit committee comprising eminent members, known for their rigour and eye for detail. Until 2009, when the huge fraud at the Hyderabad-based Satyam Computer surfaced, not many questioned the practice of reappointing auditors. However, since the watershed event in which the auditors were suspected to have played a part, there has been increased focus on the independence of these players.
The Companies Bill likely to be tabled in Parliament later this year recommends rotation of auditors. According to the provisions proposed, the same firm cannot continue beyond 10 years.
The IIAS report also expresses reservations over one of the independent directors having stayed on the board for 12 years.
"In Infosys, generally non-executive directors serve up to nine years or the retirement age, whichever is earlier. However, Omkar Goswami (independent director) has been on the board for 12 years. IIAS classifies him as 'non-independent' director. IIAS believes the length of time on the board is inversely related to a director's independence," it says.
Goswami, who was part of a Sebi committee on corporate governance headed by Infosys founder N R Narayana Murthy, said, "The committee made a non-mandatory recommendation that independent directors should not serve more than nine consecutive years subject to the retirement age of 65. At Infosys, we took a correct view that these nine years would take effect from the date when Clause 49 of the listing agreement came into being. I am 55 now. So, the retirement age will not be applicable to me. My nine-year tenure will come to an end in 2013-14. After that, I'll be off." Clause 49 of the listing agreement took effect on December 31, 2005.
According to the report, Infosys has adopted a retirement age policy for its directors. For executive directors, it is 60 years. However, the nomination committee may at its discretion allow membership post-retirement. For non-executive and independent directors, the retirement age is 65 years. However, for non-executive and independent directors appointed after October 15, 2010, the retirement age is 70 years.