IT star Cognizant finds itself stuck in another quagmire

If back-to-back quarterly earnings revisions that are far lower than what was expected isn't bad enough, the company now faces an investigation for corruption that further compounds its problems and threatens to tarnish its image in perilous times.

It's turning out to be a pretty rough year for IT star Cognizant, headquartered out of Teaneck, New Jersey and listed in the US but conducting most of its outsourced work in India.

This relatively newer firm (compared to veteran players such as Infosys and TCS) has been a consistent high-flyer, outpacing its peers in revenue growth, innovation and leadership but this year is turning out to be a nightmare one, of the kind you would not have thought possible even just a year ago.

The most recent imbroglio is about whether Cognizant improperly obtained licenses and permits required for building or renovating some of its twelve facilities in India. For instance, the Local Planning Authority (LPA) that has oversight of the company's development centre in Keeranatham near the city of Coimbatore in southern India says that the company flouted laws by constructing two extra floors at its campus without obtaining necessary approvals. Apparently, the company was given conditional approval but didn't receive an environmental clearance or a fire safety clean chit.

This may seem trivial stuff but the problem becomes much more serious if there was any bribes offered to procure those permits which is what is being alleged. To Cognizant's credit, it was the one responsible for launching the probe after detecting abnormalities and suggested that these payments "were made improperly and in possible violation" of the US Foreign Corrupt Practices Act (FCPA), a serious violation that has cost companies hundreds of millions of dollars in penalties. "We uncovered this situation through our own compliance processes, voluntarily reported it to the government, and are fully cooperating with them," said Cognizant in a statement, according to the Indian Express newspaper.

The problem with India is that it is so thoroughly corrupt that you can actually trace the career of corruption all the way from a beat cop who demands a bribe from a motorist to large sums paid to a commissioner of police since both have had to cough-up large amounts of cash to obtain their jobs in the first place, aside from other factors such as merit.

It is an established way of making one's 'real' income in government service that ultimately leads to a politician who who sits on top of this pyramid of patronage. Some of the most corrupt and therefore profitable enclaves involve local and municipal building and development authorities who are responsible for passing building plans, amongst other things.

In other words, most Indians will tell you that this revelation is nothing short of mundane. In 2015, Walmart was reported to have greased some palms in India to the tune of millions of dollars.

Still, this doesn't do much to mitigate the seriousness of the situation -- one recognised by the stock market as it wiped a cool $4.4 billion off Cognizant's market cap thanks to a stock that fell 13 percent. Cognizant has also been damaged by the resigning of its president Gordon Coburn, generally acknowledged to be the face of the company, a day before its filing of the violations with the SEC.

The most serious ramification of these violations is if the company is to be found guilty of violating the US Foreign Corrupt Practices Act (FCPA) which is ostensibly why the investment community has reacted the way it has. In the recent past, companies such as Germany's Siemens, France's Alstom and US's KBR/Halliburton all paid well over $500 million each for enforcement actions under FCPA.

Certainly, if any company can survive short-term shocks to its system it is Cognizant thanks to its stellar reputation in the industry, strong leadership and execution capabilities.

However, for a company that has seen revenue growth dramatically halving this year, that has had to drastically revise and reduce its previous earnings estimates because of a less-sanguine prognostication of the future, that is seeing business threats from plug-and-play cloud solutions providers, artificial intelligence and robotics -- the FCPA fracas is the last thing it needs.