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Is there an Infy Insider Trading Scandal?

MoneyLife claims that someone knew Narayana Murthy is coming back to Infosys and traded on it.

Yesterday, when the Sensex was down 455 points, Infosys an index stock was up 3.32% while TCS and HCL Technologies were flat. On Saturday, Infosys announced that NR Narayana Murthy would come back as the executive chairman. A case of insider trading? We will never know because Infosys is a holy cow and there will be no probe

The last line is probably incorrect. An analysis of insider trading isn’t an indictment of the company – it is an analysis into trading and individual greed. One of the problems with insider trading laws in India is that they aren’t wide enough to cover all the mechanisms possible, and that they are not effective enough to deter people through big fines or putting people in jail.

Moneylife’s line of argument is that the Infy stock rose 3.32% on Friday, when the index fell 2.25%. And that there was no “reason” for the stock to move up, given that other IT stocks were flat to down. The second part of the argument isn’t convincing as the relative move in IT stocks is generally not in line. However the first does leave room for question.

The stock move is not hugely surprising by itself. It’s been beaten down post results and much about the buying could just have been accumulation:


Even volume wise about 2.3 million shares changed hands, which is quite a bit above the 20 day average.

But the futures contracts showed no major increase in volume correspondingly.


We saw volumes of about 2 million shares (which is about 480 crores, and not extraordinary, since 1.5 million shares were traded in the futures market just two days back)

In the options space you saw some minor changes that are consistent with the day after the expiry (thursday was options and futures expiry day for may, so you expect a little building in the May futures)


(Click for larger image)

While options volumes show only a reasonable increase in the 2600 call (that’s still 10% up), it does not amount to much – if Infy were to benefit from the news and gain 15%, the total increase in interest, of 33,000 shares, would gain only about Rs. 60 lakh which is peanuts and not worth of an insider trade scandal. Also from the options it is evident that puts are equally if not more heavily subscribed to.

Futures and options are better indicators of insider trading because they offer leverage. You can buy a huge position without needing all the cash upfront. A person with inside info is more likely to use this route. Also, SEBI’s laws on futures and options exposure for insiders is fuzzy, so they might be able to get away easily.

In my view insider trading needs some kind of whistleblower to help an investigation. Going after anyone who bought more than, say, 1,000 shares of Infy on friday will be worthless. Technology can help here: you can see outliers like which participant that otherwise wouldnt trade big suddenly bought a big chunk of Infy on Friday. In fact SEBI should be doing this for every stock, and even tracking circular trades regularly.

The biggest problem is: How do you prove someone who bought had news from the inside? “Confessions” don’t work. Circumstantial evidence saying you spoke to Mr. Murthy or you are related to them doesn’t work (I know it reeks of complicity but it will not fly in a court!) An investigation of any sort needs to focus on proof beyond reasonable doubt. If you need to nail people, you need nail-able evidence, and the method to collect them. SEBI is weak on both ability of enforcement and the legal powers to investigate.

Will Infosys actually benefit from the news? I personally don’t think so. NRN is a great face, and he’s done well in the past. But he’s unlikely to be able to stop Infy’s descent, which stems from heavy competition, slowing exports, and a company that has little motivation to be at the top. The stock needs an overhaul, not a return to the old times. Let the market decide, 9:15 am on Monday.

  • Adheer says:

    Does insider trading involve criminal charges ?
    Which agency is empowered to perform investigations – EOW ?

  • piyush says:

    Just my two cents on this.
    Firstly, though I agree with the point that it seems like there was insider trading I don’t agree with the reasons that why was Infy up 3% in a down market. There are few reasons.
    a. Sharply depreciating rupee helps IT companies expand margins
    b. IT companies underperformed in the past month and half. Fund managers are moving around money in their portfolio and increasing weight on IT given where rupee is heading.
    c. Infy dropped very sharply after results and after forming a base for past two months is now breaking out
    d. So what if broader market was down 2.4%. Not necessary for everything to fall in a falling market just like there will be plenty of losers in rising markets also
    e. Such rebalancing can be expected more so on such days whr fund managers are selling out of other sectors and allocating money to defensive sectors or booking profits in stocks which did well lately and ploughing it back in stocks which have been relative underperformers.
    Regarding the volume in cash & derivatives market very difficult to form conclusions as thu was expire and things must have been all over the place. Expiry sees larger volumes. Even vol on friday cannot be conclusive. Typically i dont trade in Infy, friday i did as it was rising in a falling market showing strength and I typically like to trade long only… so it was only possible play. There could have been others like me. It was an intraday trade.
    None the less, despite all this, I still say it seems like that the news did seem to leek out to some people in the afternoon, as from seeing the screen I could sense that it was very different from usual. But then, what do I know, before i knew the news it just seemed like a breakout move to me. After hearing news I can say it seemed odd and different.

  • Praveen Vishnu Shamain says:

    In my opinion, NRN has taken a big gamble here. If he is successful in turning around the fortunes of the company, people will continue believing him as an inspirational leader. But, if he fails in delivering, history will forget his past achievements, will remember only his current failure. After all, public memory is very short.
    What surprises me is the initial euphoric reactions in the market, this morning.
    How can any seasoned participant in the market forget Infosys diving in April 2003 (that too when NRN was at the helm of the affairs)?
    Finally, it is NOT an individual who can change the fortunes of the company like Infosys, which totally depends on other countries for its business. Business environment has changed. Competitor will not lie down quietly – will become more aggressive on price fronts.
    Interesting to watch – how long this honeymoon period will last.

  • Murty says:

    Was it 5 years back that Mr. RamaligaRaju of Satyam openly admitted the financial jugglery to the dismayed world? He too built a system and many people ran after him for a decade and many systems followed suit!
    Infosys was built in a similar way upon the conviction of a single individual. I still remember someone suggesting to buy a few Infosys shares in 1997, which would have made me a million worth.
    What happened in December was an insider trading and what happened after Quarterly results itself is an insider job. The way Infy is dealing issues post NRN era were going in the same Satyam direction. Infy 3 was a similar financial jugglery of Sorens and Kamats, and if continued , would defenitely lead to the Satyam end. Sensing this, NRN came back to the rescue mission.
    Infy had piles of cash, and the dollar fluctuation might also be one of the reason for the share price variation , as you said, there might be many reasons for what is happening these days.

  • Murty says:

    What is that Chintan Shah wanted to tell us on the board of Supreme Industries about the “Audited Financial results”? Deepak, Can you elaborate?