Infosys feud and whistleblower email threaten to sink the iconic Indian firm

Over the past three weeks, an almighty, ugly row has erupted at India's most iconic and celebrated technology company, threatening to rip the firm apart if the peace between the warring factions doesn't hold.

That hypothetical peace looks even more tenuous considering an anonymous whistleblower's email to the country's stock market regulators and a handful of newspapers on Monday alleging that some members of Infosys' management team benefitted from a previous acquisition.

First, some background to understand this mess.

On one side of this increasingly bitter divide is the venerable elder statesman of not just Infosys, but Indian IT itself, Narayana Murthy, who has burnished a reputation in India for honesty, frugality, and for being a pioneer in corporate-governance. Murthy and his fellow co-founders are famous for their humble ways such as flying economy class and living unflamboyant lifestyles, as opposed to their more gaudy business brethren in other parts of India.

On the other side is Vishal Sikka, a gregarious and larger-than-life tech wunderkind and ex-CTO of SAP, who is used to absolute dominion over his terrain and is a hard-charging, no-holds-barred manager tempered from many years spent in the Valley. Sikka is also the first non-founder CEO that Infosys has picked in its history. He came on board in 2014 and the move was generally heralded as a very savvy and necessary hire, purloined from SAP at a time when Indian IT desperately needed (and still needs) tech visionary leaders to guide them into what is increasingly looking like a murky future.

Now the two -- both of whom are generally known to be men with large egos who crave public approval and can both be unrelenting in pursuing their goals -- are so doggedly at each other's throats in such an unseemly public spat that there is concern that it could derail the firm at a time when the entire industry is in crisis.

Before the anonymous letter detonated a few hours ago, the spat between Sikka and the man who hired him had come to a head earlier this month when Murthy used the media as a forum to publicly question two instances of what he and his co-founders (who collectively own 12.75 percent of Infosys) think are examples of egregious compensation: One, that Sikka's salary last year of $11 million (versus $7 million the previous year), was way too high. Two -- and this is where the nub of the acrimony lies -- that erstwhile CFO Rajiv Bansal, who departed in October of 2015, was given an astonishing 17.4 crores rupees (around $3 million) in severance payment, which Murthy and others subsequently pressurized the board into stopping after 5.2 crore rupees was already disbursed.

THE PANAYA SAGA

There's a contentious background to Bansal's payment and departure though. Apparently, as Mint newspaper reports, on February 15, 2015, the Infosys board was in session to green-light the $200 million acquisition of Israeli automation firm Panaya when, after about 30 minutes, Bansal walked out. Apparently, he didn't approve of the acquisition since he thought Infosys was overpaying, but what he was really miffed about was his apparent exclusion from the prior deliberation and due diligence process, although he apparently eventually sided with Sikka over the purchase in the long run.

Predictably, Murthy hasn't been too impressed by the Bansal saga. To begin with, he thought that the compensation committee had wronged employees and shareholders of Infosys by awarding Sikka such a high salary last year. "In companies with good governance in developed countries, the ratio of the CEO salary to the next lower level is generally 1:2. At Infosys, today, it is about 2,000 between the CEO salary and the entry-level salary for a software engineer," said Murthy in an extraordinary interview. "In poor countries like India where capitalism is still nascent, it is the responsibility of leaders of capitalism to ensure that these ratios are even lower," he added.

The Bansal affair just deepened the rot for Murthy. Suddenly, here was a possible reason for his humongous severance. "Such payments raise doubts whether the company is using [them] as hush money to hide something," he said to the Economic Times. "Doing a forensic audit one year after the event is just laughable since everybody knows that any trace of misdeeds can be erased within that period. Even if no misdeed has taken place (I hope so), rationalising it as 'generosity' points to utter arrogance towards honest employees, total lack of fiduciary responsibility, and an unbelievable lack of application of mind," added Murthy.

Today, the anonymous whistleblower letter succeeds in adding another layer of grime to the already damaging feud. It claims that Panaya was valued by venture outfit Israel Growth Partners at a much lower figure of $162 million during an E-series funding a month prior to the purchase, where the VC firm picked up a 12 percent stake. The letter points an accusatory finger towards Hasso Plattner, SAP co-founder and Sikka's former colleague, who held a 8.3 percent stake in Panaya, as evidence of impropriety.

Sikka instantly dismissed the insinuation of making money for his friends as ridiculous. "Hasso Plattner was an early investor in Panaya. That makes no difference. We were aware of the company many years before that. This is a man worth more than $10 billion. And 5-6 percent in a $200 million deal is nothing."

In a rebuttal to the whistleblower email, Sikka immediately fired off an email to his employees on Monday that said this: "Change is never easy, and change at the scale that we are undertaking may be unprecedented, and perhaps it is this change that has so inflamed some into trying to drag us all into the mud ... Once again today, some newspapers have carried false and malicious stories ... These speculations are clearly designed to tarnish our reputation. They create a false alternate reality out of events and dates, with embellishments that are calculated to mislead and sensationalise,'' said Sikka, while promising a full investigation into the allegations.

There are those in the global tech firmament who think it's absurd that Sikka and the Panaya acquisition are being questioned. Today, in an era of AI and automation where the old-outsourcing model is fast disappearing and beleaguered Indian IT is desperate to win new deals in a brave new world, Panaya's automated SAP upgrades are evidently a crucial value-add to Infosys deal wins. According to this observer, Panaya was able to save time and expense for code upgrades that often helped Infosys snag hard-to-get contracts and contribute in a major way to Infosys' overall transformation and process automation strategy. If at all the firm did overpay by a little, it was more than justified considering it could have been quickly snapped up by other eager sharks cruising the IT waters.

SIKKA'S TURNAROUND

In its defense, Infosys says that a third-party valuation was also undertaken by Deutsche Bank and the acquisition price fell "within the band" prescribed by them. However, what must be galling to Sikka and his supporters is the fact that Infosys is undeniably in the middle of a turnaround under his watch. It has emerged from being a laggard under its co-founders in recent years to, once again, an industry leader, that too in an environment fraught with existential threats.

"We have been enormously pleased to see the stabilising hands of Vishal Sikka, who has improved underlying operating performance and begun to articulate a coherent strategy to a firm beset by a host of structural challenges to the ageing offshore IT service industry," said Oppenheimer Developing Markets Fund, which holds a 2.13 percent stake in the company, in a public letter. "We would strongly encourage the board of directors to restrain divisions in the firm and contain inappropriate interventions by non-executive founders. Let Vishal do what he was hired to do, without distractions. And appraise him on his efforts," it added.

In an era of alternative truths, the following statistics don't lie: Infosys's stock price has shot up 7.5 percent since August 2014, easily outpacing those of TCS and Wipro, which have both fallen by 4.1 percent and 17 percent, respectively. Sikka has tamed attrition at his firm from a sky-high 25 percent to 18.4 percent, ensured that margins remain constant despite enormous pricing pressure, and navigated his company to an industry-leading revenue growth of 9.1 percent last year. If he wasn't making his current salary at Infosys, he would easily be doing it somewhere else given his credentials.

Moreover, co-founders like Murthy complaining about Sikka's compensation is a little too convenient -- after all, Murthy and his cohort benefitted enormously from dividends clinking into their bank accounts thanks to their vast stock holdings. It was easy to boast about a frugal salary while your real income was being generated thanks to their shares in the company.

On the other hand, Murthy is right to question the eye-popping severance given to Bansal and rubber stamped by the board. Why would you do so to this CFO when no one in the history of the firm, never mind its CFOs, got such a mouth-watering payment? Why was the severance made public more than six months after the CFO left the firm? Why were there no minutes taken when the board met to discuss the severance? Why were concerns regarding the severance dismissed high-handedly?

The recent anonymous whistleblower promises to unveil much more detail about the Bansal-Panaya affair and other goings-on at the firm. Sikka recently referred to himself a "Kshatriya" warrior promising to duel everyone and everything that unfairly, he thinks, maligns him and his firm (inadvertently invoking the great Indian epic Mahabharata, which ironically also contains the "Bhagavad Gita", the seminal Indian treatise on duty). "We cannot let these stand unchallenged, and we will take every step and pursue every avenue to strongly defend the company in the face of these unfair and unwarranted attacks," he said.

At this point, both him and his company's founders should first pray that the anonymous email contains nothing but old news and will be ultimately insufficient in preventing a remarkable turnaround for a moribund company -- and then, for the sake of both their firms, head straight to a psychiatrist's office for some marriage counseling.