TCS: Is the Software Sultan on a Slippery Slope?
On 15 October 2023, Tata Consultancy Services Ltd (TCS) intimated to the stock exchanges about the closure of the investigation undertaken by the company, with regard to the allegations that emerged in June 2023 about a scandal in the resources management function (RMG).
 
When the matter first surfaced on 23 June 2023, it sent shock waves across business circles as connecting a major bribery scandal in the procurement of recruitment services to the iconic TCS brand was heresy, at the least!
 
The media estimated that bribes to the tune of Rs100 crore may have passed hands which the company denied vehemently.
 
The closure intimation is quite skeletal and states that 19 employees were identified for their involvement in the episode, 16 of whom had been removed from service.
 
A statement contained in the said communication, extracted below, is quite intriguing to a lay reader:
 
“We would like to reiterate (i) that this does not involve any fraud by or against the Company and there is no financial impact; (ii) the issue relates to breach of Company’s Code of Conduct by certain employees and vendors supplying contractors; and (iii) no key managerial person of the Company has been found to be involved.”
 
The company has not shared the full investigation report in the public domain. Hence, it is not possible to fathom the extent of the problem and its exact nature.
 
But what puzzles an outsider is how an episode resulting in the wrongful behaviour of 19 employees (presumably officer-level personnel), which finally resulted in 16 of them being dismissed, is not in the nature of a ‘fraud against the company’ and the connected assertion that there was no ‘financial impact’.
 
Allegedly, this was a case where some recruitment agents were favoured for a purported illegal gratification or benefit obtained by some employees. Typically, no businessman would pay a bribe if she did not benefit from the deal. The same should have been the case here.
 
It was either that the service-provider(s) obtained a higher fee, or got out-of-turn assignments or favours, or provided a substandard service for an approved level of fees or a combination of these. Or they billed for hands not supplied, a la the muster role scandal in Madras Corporation many years back!
 
In all the situations, the company would have lost in some manner. It is obvious that the company is viewing ‘fraud’ in a narrow sense; that fraud is only when company funds are directly misappropriated or a crime is committed under the penal code.
 
Just for immediate reference, the definition of fraud under the Companies Act is given below.
 
“Fraud” in relation to affairs of a company or any body corporate, includes any act, omission, concealment of any fact or abuse of position committed by any person or any other person with the connivance in any manner, with intent to deceive, to gain undue advantage from, or to injure the interests of, the Company or its shareholders or its creditors or any other person, whether or not there is any wrongful gain or wrongful loss..."
 
A normal code of conduct violation is unlikely to have surfaced as a sensational scandal in the first place or taken a three-month effort of some professional agency to assess the extent of the transgressions.
 
To not belabour the point, it would appear that the company is shy to accept the extent of the problem, its lack of systems, checks, supervision and oversight and, most of all, owning up to the lapses at the higher levels of governance!
 
This is more of a preamble that such a lapse or governance gap is not just an isolated instance. 
 
On 21 November 2023, in a disclosure to the exchanges, the company confirmed that its appeal before the US Supreme Court in the EPIC Systems Corporation case was rejected.
 
This is no ‘epic’ of heroics for TCS! 
 
Or something it would want to be remembered of any time after charging off the damages in its next quarter’s accounts!   
 
The dispute with the electronic health records giant EPIC goes back to 2014. In a lawsuit filed nine years ago, EPIC alleged that TCS and its subsidiary Tata America International Corporation stole its intellectual property.
 
EPIC had originally secured a US$940mn (million) award against TCS from a Wisconsin federal jury in 2016 in what was one of the biggest trade secret verdicts in the US. The total damages included US$240mn in compensatory damages and US$700mn in punitive damages.
 
Since then, the state and the federal courts pruned those numbers down to US$280mn in total damages.
 
In August 2020, the Court of Appeals for the Seventh Circuit held that the punitive damages were 'constitutionally excessive' and recommended the district court pare it by half to US$140mn.
 
 
The company has confirmed that it will charge off the amount in the next quarter, thereby admitting finally its culpability. Maybe it could have worked out a compromise with the litigant and saved some worthy dollars in legal fees and with less publicity to the matter.
 
When caught on the wrong foot, the typical response of the senior management and the corporate boards is to litigate, irrespective of the merits of the case, to establish their ‘bona fides’. This is with the full knowledge that such litigation is expensive anywhere in the world, not to speak of the US, where it costs an arm and a leg!
 
Whereas owning up to a mistake and nipping the litigation in the bud is perceived as being cowardly and an admission of the guilt!  
 
Hot on the heels of the EPIC saga, comes the lawsuit filed by DXC Technology, a company formed by the merger of Computer Science Corporation (CSC) with a division of Hewlett and Packard’s enterprise services business.
 
This case pertains to a lawsuit filed in 2019 alleging that the employees of TCS assigned to develop its ‘BaNCS’ platform encountered difficulties devising a software solution for calculating a rate of return (ROR) in a particular insurance context.
 
The suit cites emails exchanged among the employees of TCS that they found the necessary solution in the Vantage software which was a proprietary CSC product.
 
Later, a TCS employee allegedly copied and pasted the actual Vantage source code pertaining to this calculation, and the resulting Vantage calculations, into an email and sent it to his TCS colleagues.
 
The jury has ordered payment of US$210mn as damages. TCS has issued a statement that it doesn’t accept the jury verdict and would fight the matter in appeal.
 
While technically, TCS may contest this matter like it did the EPIC case, there is certainly enough cause for disquiet in all the three recent episodes mentioned in this article.
 
The general import in the communication that the company makes in such matters is that it is just business as usual. While it is illogical to expect that the company will list all its faults like a confessional statement, the lack of regret that such occurrences spoil the overall corporate image is patent.
 
Even the annual report will disclose little or no information on all these matters, except in carefully secreted notes either under contingent liabilities or in some unnoticeable corner.
 
No company shares in detail a post-mortem of such episodes and how the course correction would be undertaken to set right the systemic flaws and the fixing of the onus at the higher executive level.
 
It can only be speculated if the unstated reason for the sudden and surprise exit of its earlier chief executive officer (CEO) in May 2023 was, in some manner, related to one or more of these issues.
 
Keeping such developments under wraps is par for the course in India, where the promoters dominate the narrative in the board and the independent directors, who are liberally remunerated with a commission of Rs2.5 crore to Rs2.75 crore as in TCS, see no reason to cross swords!
 
TCS has an added onus to live up to the image of the Tata group that set much store by transparency and better corporate governance standards than a typical Indian corporation!
 
(Ranganathan V is a CA and CS. He has over 43 years of experience in the corporate sector and in consultancy. For 17 years, he worked as Director and Partner in Ernst & Young LLP and three years as senior advisor post-retirement handling the task of building the Chennai and Hyderabad practice of E&Y in tax and regulatory space. Currently, he serves as an independent director on the board of four companies.)
Comments
Kamal Garg
3 months ago
So, there are three cases out of which two cases did originate during the tenure of N. Chandra when he was the CEO of TCS.
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