Cost of board dissonance: Coforge’s brush with OP Bhatt’s sudden exit

To recall instances in recent years where the influence of large shareholders on the board caused differences, especially in the IT sector, back in 2017, Infosys saw R Seshasayee resign as chairman amid differences with the company’s founder. Now, Noida-headquartered firm Coforge is seeing a similar boardroom development, with the sudden exit of OP Bhatt being seen as a large shareholder’s disapproval of his continuation on the board beyond his first term.

At the core of his resignation is the company’s internal auditor, KPMG, which, along with other matters, reviewed the process followed with respect to the Board Evaluation Exercise. “The review identified certain concerns in relation to the manner in which the BER had been dealt with and presented to the Board, including that certain material information contained in or relating to the BER and the performance of the Chairman had not been fully disclosed to the Board when the BER was presented,” the company told the exchanges in its statement.

Encora acquisition changes Coforge’s shareholder structure

Bhatt’s exit comes at a time when Coforge is getting bigger and growing faster. With its eyes set on becoming a $5 billion revenue firm by FY30, the company concluded the acquisition of California-based digital product and engineering firm Encora for $2.35 billion in April, with Advent, Warburg Pincus and other minority shareholders of Encora rolling into Coforge’s shareholding.

The deal covenant also gave Encora investors the right to appoint two nominee directors on the board, one each on the Nomination and Remuneration Committee and the Audit Committee of the company. Atin Jain and Shweta Jalan from Advent Private Equity joined the company’s board as non-executive directors on April 23 this year. Bhatt was also a member of the company’s audit committee, stakeholders’ relationship committee and capital raising committee. On the same day, the company’s shareholding pattern showed Encora investors holding 21.18% in the company following completion of the acquisition.

Bhatt joined the board as an independent director on May 1, 2024, for a term of three years and as Chairperson of the Board with effect from June 29, 2024. With his first term scheduled to end on April 30, 2027, the company’s AGM notice for FY26, put out at the end of June, also had a special resolution seeking his reappointment, recommended by the nomination & remuneration committee and the board of directors, to continue as an independent director and chairperson of the board for a second term of five years, extending his tenure up to April 30, 2032, beyond the age of 75 years.

However, following the company’s AGM held on August 24, the scrutiniser’s report on the voting, filed with the stock exchanges on August 26, revealed that the special resolution had not been passed due to a lack of the requisite majority. Some 34.5% of votes were cast against the resolution, mainly by a section of public institutional holders. Bhatt, in his resignation email, referred to carefully considering the matters raised with him concerning the Board Evaluation process, his response to those matters, and the circumstances that had followed before taking the decision. “I believe that continuing on the Board while there remains a disagreement considering the characteristics of my good faith actions in the Board evaluation process would not be conducive to the effective functioning of the Board,” his resignation stated.

Governance questions remain as brokerages see limited impact

Corporate governance experts see this both as evidence of strong internal checks on governance and, at the same time, seek clarity on the ‘material information non-disclosure’. Experts also stress the need for a better flow of information at the board and stakeholder-management levels, even as the materiality of the incident could warrant additional information disclosures that may be called for by external auditors of the company during the fiscal year.

While the exact nature of the material information contained in or relating to the BER and the performance of Bhatt under evaluation has not been disclosed, the company has maintained that this has no implications for the financial statements or financial reporting of FY26. “The Company also clarifies that such matters do not have any bearing on the Company's operations, business performance and near-term, medium-term or long-term stated guidance,” Coforge stated.

On September 10, shares of Coforge saw early gains on the BSE but settled in the red, down 0.21% at the close of the day. Analysts and brokerage reports have seen this largely as a non-event. Motilal Oswal Financial Services, in its note, said it sees limited implications for the underlying business as of now and awaits more clarity on the permanent appointment of the new chair. Reiterating its Buy call, the brokerage said, “We have kept our estimates unchanged following this development. We continue to expect Coforge to be the growth leader within our coverage universe and reiterate it as our top pick. Strong deal wins, continued execution, improving cash conversion, and further margin upside from the Encora integration support our medium-term growth outlook.”

Similarly, Axis Capital and Nuvama both retain a ‘Buy’ rating on the stock. Axis Capital said that it did not see the exit as a larger governance or accounting problem related to the business. Further, it pointed out, “We note that the current board after Mr. Bhatt's resignation no longer has a majority of independent directors, and this is something we expect the company to correct and restore the board to having a majority of independent directors.”