On Friday (September 30, 2016) Cognizant Technology Solutions, one of the leading IT services companies, submitted that some of its offices in India paid bribes in violation of US laws. CTS has 45 facilities in India of which 12 are owned.
The revelation came in a filing by CTS to the US government. Under the US Foreign Corrupt Practices Act voluntary disclosure of violations limits the severity of the fines that are imposed. We can infer that something got dug up and CTS board decided to own up rather than get caught by the regulators.
Note that CTS did not bother to inform the Indian government or the public about its corrupt practices in India. It has to come out through the US regulatory process. That is the rule of law applicable to corporates in India.
What are the allegations?
1. At various points in time, bribes were paid to different political parties in various land deals the company had entered into for setting up development centres.
Bah! Anyone going to a Tahsildar’s office in India knows how papers move there. So a smart guy figured out that CTS has been paying bribes for land dealings. What a big deal! So there must be something more than what meets our eyes.
2. There is also nexus between the human resources team and engineering colleges across Tamil Nadu. Cognizant is a bulk hirer of graduate engineers. Investigators are looking at the recruitment process. A senior human resources team member has resigned.
Even though this might come as a surprise to many people outside IT industry who mistakenly believe that private enterprises are ‘honest and corruption free’, it is not news to those in the industry that HR managers in IT industry use every available opportunity to line their pockets. It can be as per company rules (say, screwing the employees to cut cost for the company to bag a rise for themselves) or in violation of rules (for example, acting as recruiter and HR consultant at the same time to pocket company money in their accounts.).
HR shrinks taking money from private “for profit” educational institutions to ‘place’ their graduates has become a widespread practice. The private college gains “reputation” and record of placement. The IT company gets “talent”. The graduate gets return (a job) for his investment (in education). In this wonderful world of free enterprise and corporate democracy, every one wins!
What are the smoke signals coming out of CTS?
1. CTS’s president, Godorn Coborn, has quit and CEO of IT services Raj Mehta has appointed president. On a side note, it is not a big sacrifice for Raj Mehta to take up the job at this juncture. He is looking at a base salary of $630,000 (about Rs 4.22 crore) + 85% annual cash incentive.
2. During the quarter ended June 30, 2016, the company reported a 40 per cent drop in profit of $252.4 million from $420.1 million, a year ago.
3. Cognizant is already facing project cancellations and rampdowns from its clients in financial services and healthcare verticals. Cognizant gave guidance of $13.47-13.60 billion this year, down from $13.65-14 billion previously. Its current year revenue growth of 8.5% to 9.5% will be its slowest since 1996. The company cited “near-term macroeconomic headwinds.”
What are the after effects?
1. After the announcement about bribery scandal, Cognizant’s stock price crashed nearly 15% in pre-market trades at Nasdaq.
2. There is a report in Times of India on 4th October 2016 that CTS was constructing buildings without approvals at its development centre in Keeranatham near Coimbatore. The IT major constructed two extra floors at its campus in Keeranatham near here without obtaining necessary approvals. The local officials carried out inspections after an under construction building at Moulivakkam in Chennai collapsed on June 28, 2014 killing 61 workers. In a letter issued by the Directorate of Town and Country Planning (DTCP) on August, 18, 2016, the company has been asked to submit environmental clearance and a revised no objection certificate (NOC) from the Fire and Rescue Services department.
We can expect more such reports of wrongdoings by CTS, as the vultures are gathering to pick on its wounds.
But, Times of India and its media brethren should explain why none of them did not choose to publish the news about building violations by CTS in August itself? How many other such notices are issued against major corporates which never see the light of press?
3. In a mail addressed to associates last Friday, CTS said, “Associates should not provide any information to either members of the investment community or the media regarding recent announcement.”
But, we believe that only the employees can bring out the truth. Every one condemns corruption as long as it is not in their office. It is hightime Cognizant employees come out with whatever little knowledge they have about the wheelings and dealings inside the company. Only when all such bits of information gets combined, the full picture will emerge.
How will it play out?
CTS might manage to cover its tracks successfully and come out of this episode with little damage to its top management and shareholders. The losers will be only CTS employees and the public.
The company management or the Indian authorities, or even the auditors will try to cover up as much as they can to protect the interests of the money bags (top management and investors). Eventually the burden of these corrupt practices will be passed on to the employees as lay offs, retrenchments or increased work load.
We should also remember the story of Satyam scandal. In 2008 Satyam went under, thousands of its employees lost their jobs, a new board was appointed, Tech Mahindra took over the company taking care of the investors.
Satyan happened immediately after the beginning of US financial crisis. The market was shrinking and one or two companies going under is good for the rest in terms of reduced competition.
Now in 2016, the clients are cutting back on projects, profits are being squeezed, companies look to pass on the burden by retrenching employees and or putting more pressure (more work, more hours, more tension) on remaining employees. CTS folding up might not be bad news for other IT services players. They would not mind dividing up the market vacated by CTS to boost their own business. It is a dog-eat-dog world of savages.
Let us wait and see how this unfolds!
- Cognizant starts investigation in India operations for payment of bribes
- Cognizant’s Coimbatore facility under inquiry for unapproved construction
- Cognizant investors wary of bribery probe outcome
- Scope of Cognizant’s investigation on bribery may widen
- Satyam Scandal – who, what and when?