Cognizant investors grapple with business and legal uncertainties2 min read . Updated: 03 Oct 2016, 10:19 AM IST
If government agencies find wrongdoing, there could be a fine in store; besides, the company may lose business because of reputational issues
Cognizant Technology Solutions Corp. lost $4.4 billion in market capitalization after it disclosed a corruption probe and the resignation of one of its senior-most executives.
“The company is conducting an internal investigation into whether certain payments relating to facilities in India were made improperly and in possible violation of the US Foreign Corrupt Practices Act (FCPA) and other applicable laws," it said in a filing with the Securities and Exchange Commission (SEC). Cognizant also announced the resignation of Gordon Coburn, who was effectively the second-in-command at the company.
The two announcements coming together was clearly too much for investors to handle. Cognizant’s shares fell as much as 13.3% on the back of fears that Coburn’s resignation could be because the scale of the improper payments was significant.
According to an analyst, the uncertainty and the lack of clarity is making investors jittery. If government agencies find wrongdoing, there could be a fine in store. Besides, the company may lose business because of reputational issues.
About a year ago, The Wall Street Journal had reported that the US government found Wal-Mart Stores Inc. paid bribes worth millions of dollars to local officials in India.
The US agencies probing the company haven’t announced a fine or a settlement yet, but Wal-Mart has spent hundreds of millions of dollars so far investigating the possible payment of foreign bribes. The largest FCPA enforcement action, so far, was in the case of Siemens AG, which paid $350 million in disgorgement to settle SEC’s charges, and a $450 million fine to the US department of justice (DoJ) to settle criminal charges. In 2014, Alstom SA pleaded guilty and agreed to pay $772 million to end an investigation by DoJ.
Of course, the eventual fine or settlement fees will depend on the quantum of improper payments, if any, made by Cognizant, and the extent to which it profited from these payments. Thanks to Coburn’s resignation, speculation about how severe the hit can be are running wild.
Cognizant is already grappling with a slowdown in growth rates; it brought down its revenue growth guidance for 2016 in August, and now expects revenue growth to be in single digits. Since then, commentary by other IT services companies such as Tata Consultancy Services Ltd suggests things have deteriorated. As such, the timing of the corruption probe couldn’t be worse.
Cognizant shares have fallen nearly 25% from end-March levels, owing to the twin impact of the business slowdown and legal uncertainty.