IMPROPER PAYMENTS for gaining permits and building licences for some of its 12 facilities in India have landed the country’s third largest IT-BPO sector employer, Cognizant Technologies Solutions, in trouble.
These payments, which “were made improperly and in possible violation” of the US Foreign Corrupt Practices Act (FCPA), have rattled investors and sent the company’s stock into a tailspin since the controversy broke over the weekend.
The New Jersey-based, Nasdaq-listed firm made a filing with the US Securities and Exchange Commission (SEC) on September 30, saying it was conducting an “internal investigation” into the matter.
It also announced in the same filing that its president Gordon Coburn, considered to be the face of the company, had resigned from his position two days prior to the filing, resulting in the stock tanking over 13 per cent and wiping off nearly $4.4 billion in market capitalisation.
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Responding to queries on the case from The Indian Express, a Cognizant spokesperson said: “The investigation is currently focused on improper payments such as building licences, permits, etc., involving a small number of Company-owned facilities in India.”
The e-mailed response said, “As of December 2015, the company had 45 facilities in India, of which 12 are owned.”
The spokesperson, however, did not confirm whether Coburn’s stepping down was related to the corruption case. “It was Gordon’s decision to resign,” said the spokesperson.
“We uncovered this situation through our own compliance processes, voluntarily notified the relevant US agencies, and are fully cooperating with them. We are conducting a full investigation, under the oversight of the Audit Committee of the Board of Directors, with the help of outside counsel,” said the spokesperson.
While the company has pegged the “internal investigation” to be in its “early stages” and refrained from predicting the level of action that could be taken by it, the US Department of Justice or the SEC in connection with the investigation, the worry for its management and shareholders could be the fate of firms that have faced FCPA action in the past.
The list of top ten FCPA enforcement actions include those against Germany’s Siemens, which ended up paying $800 million in 2008; France’s Alstom ($772 million in 2014); US oil and gas major KBR/Halliburton ($579 million in 2009); and, the UK defence firm BAE systems ($400 million in 2010). Foreign companies dominate the list of entities that have paid the highest penalties when faced with FCPA action, with just two US firms in the top ten.
The payment trouble at Cognizant comes at a time when the company’s financial performance has taken a knock. During the
quarter ended June 30, Cognizant reported a net income of $252.40 million, down 40 per cent from the same period a year ago. Its profits were significantly lower due to the impact of a higher tax payout because of a one-off remittance of $2.8 billion in cash from India on account of a share repurchase.
The April-June period was the second straight quarter when the company lowered its annual revenue guidance. Cognizant reduced its full-year revenue growth target to between $13.47 billion to $13.6 billion, a growth rate of just 8.45-9.50 per cent.
On the broader implication of the Cognizant issue, president of the National Association of Software Services and Companies (Nasscom) R Chandrashekhar said that while the company owning up to the case was in keeping with the corporate governance norms of software and BPO firms operating in India, the possibility of an industry-wide implication on the Indian IT-BPO sector was remote.
“The incident is a one-off case, and we don’t see an industry-wide implication. As of now, the facts are not clear to anyone because the investigation report is not out. But the Indian IT industry’s value proposition can not be altered because its an individual case,” Chandrashekhar said.
However, from an analysts’ viewpoint, the fear for Cognizant does not arise solely from the high penalty amount it may have to pay, but also from the possibility of losing reputation among its clients that could lead to the firm losing its business.
In October 2015, retail major Walmart was also reported to have paid bribes in India, according to The Wall Street Journal, which also said that Walmart’s alleged bribery in India involved several small payments to low-level local officials to help move goods through customs or secure real estate approvals.
“The vast majority of the suspicious payments were less than $200 (about Rs 13,000, at the current exchange rate), while some were as low as $5. But when added together, these totalled millions of dollars,” the report had said.