Cut & Thrust: The man who knew too much
What has changed between Feb & Aug at Infy? Nothing. The issues, state of play and conflict resolution remain the same, so why did Sikka go?

At the height of the cage match between Infosys Founder N. R. Narayana Murthy and CEO & MD Vishal Sikka in mid-February, Sikka came up with a bizarre comment which created a maelstrom on socmedia. He famously remarked – I am a Kshatriya warrior. I am here to stay and fight. Odds for the same man to cut and run in the face of relentless pressure being exerted by Murthy on the foul odoured Panaya deal. Curious that Sikka was seen jumping off the high dive as his Promised Land narrative for Infy was to be bushwhacked only six months later.

Pertinently, some of the questions raised by the whistleblower stuck like a limpet with Murthy primarily due to his fabled penchant for ethicality and corporate governance standards. What could the whistleblower have uncovered? Why was R. Seshasayee unconvincingly heard saying at the February presser – There was subjectivity in determining the amount of Rajiv Bansal's severance package (this is after Murthy alluded to hush money being paid to him for secret competitive data)...There will be no more Bansal like situation at the company going ahead. Complicit, admission of guilt, brushed under the carpet, call it what you will, Murthy pursued the matter because Bansal never signed off on the controversial Panaya deal. The whistleblower's expose claims that Rajiv Bansal walked out of the board meeting where Panaya was approved. Bansal thought Infy paid at least $38 million too much for it, he pegged it at $162 million rather than the $200 million paid. The long walk between subjectivity and objectivity has to be addressed. A non-disparagement agreement between outgoing CEO & MD Sikka and Infosys may complicate the issue further. Will the truth emerge on Panaya? I am quoting from the whistleblower's email and countering it with both Sikka and the then company's counter statement so that one is fair and transparent. The moot point remaining – what changed materially between February and August. The prickly issues and sticking points remain the same, then why this precipitous action? Here is the sequence of events:

Let us examine the Panaya Acquisition:

Infosys announced the acquisition of Panaya in February 2015 for $200 million. This is one of the most conflicted transactions with little or no board oversight.

Panaya had raised $59 million in funding during its full existence which includes $20 million raised in Series E round at a fully diluted valuation of $162 million (At the time of the Infosys transaction the Series E holders held 12.31 per cent of equity on fully diluted basis). The Series E round happened on January 8, 2015. (

Infosys acquires Panaya on February 16, 2015 for $200 million valuing the company at around 25 per cent premium to the valuation series E investors came in on January 8, 2015. An IRR of 300 per cent to the last investors.

Infosys allows Panaya shareholders to strip the cash out of the company before acquisition. The entire $20 million invested in the company on February 16, 2015 had been taken out and distributed to the shareholders of Panaya. See the subsidiaries balance sheet published by Infosys Limited on Panaya Inc. The cash and cash equivalents had come down from Rs 127.29 crore to Rs 1.37 crore between 2014 and 2015. In addition, Infosys Limited had pumped in another $20 million of short-term loans to make Panaya viable. In total, the total purchase consideration may be more than $200 million and it could be close to $230 million.

 Serious trouble

Panaya appeared to be in serious trouble till January 2015. The company was struggling to raise money. Lot of employees were leaving the company. In 2013 and 2014, Panaya laid off 25 per cent of the employees of the company. The CEO Yossi Cohen who was holding 8 per cent of the company had left. The company appointed Doron Gerstel as the CEO of the company on April 7, 2014. It was the talk in the tech circle in Israel that this company is going down.

This is where it begins to get complicated. In September 2010, HPV, the venture capital fund of Hasso Platter, co-founder of SAP AG invested $ 6 million in exchange for a certain equity share in Panaya. HPV also bought shares held by Tamares Group, a private equity investment firm based in Vaduz, Liechtenstein.

In total, HPV held 8.33 per cent stake in Panaya on a fully diluted basis at the time of Infosys acquisition making Hasso Platter richer by $17 million.

The whistleblower then drops the first bombshell and shrapnel goes flying in all directions. Result: collateral damage. The investment by Israel Growth Partners in January 2015 raises more suspicion. It is rumoured that two top functionaries of Infy held indirect stakes in Israel Growth Partners and personally benefited from this deal.

The Israel media said at the time of acquisition by Infosys as follows:

“As far as the investors in Panaya are concerned, this is a good deal, since the company was in a severe state of crisis and had laid off employees, and now they are receiving a decent return on their money. The list of investors includes the Benchmark Capital and Battery Ventures venture capital firms, alongside Hasso Plattner Ventures. Hasso Plattner was among the founders of SAP. Haim Shani and Moshe Lichtman's Israel Growth Ventures came into the company at the last minute before the exit, investing $20 million in January this year. Altogether, Panaya raised $59 million.” (

The board of Infosys blindly approved the deal. The CFO of Infosys at that point of time – Rajiv Bansal – refused to sign off on the deal and, in fact, walked out of the discussion during the board meeting to approve this deal.

There are serious issues on governance and nepotism in this deal which the Board of Infosys had never applied their mind and looked into.

 Fusillade unleashed

Then a fusillade is unleashed by the whistleblower:

*Why did Vishal Sikka, CEO of Infosys not inform the board about the conflict in this deal; his SAP Boss – Hasso Platter – held significant stake in Panaya at the time of the deal (He was holding 8.33 per cent of the fully diluted equity)?

*Why Infosys paid $200 million to Panaya on February 16. 2015 when it was just valued at $ 162 million on January 8, 2015?

*Who is behind the investors of Series E round which happened on January 8, 2015? Is it not true that two top functionaries of Infosys (names withheld) hold indirect interest in Israeli Venture Partners?

*Why did the board of Infosys not question the rationale of giving a 25 per cent value upside for this company in just one month?

*Panaya had retrenched 25 per cent of its work force and was struggling to raise money. Mysteriously, Israeli Venture Partners invests $20 million on January 8, 2015, just one month before Infosys’s acquisition earning an IRR of 300%. What is the reason? If you take into account the cash stripped out of more than $20 million, the returns could be much higher?

*Why was Panaya management allowed to strip the cash in the balance sheet of more than $ 20 Million before the acquisition?

*Why had the Infosys board not looked into all these issues and questioned the management on this deal?

This is followed by a long litany of questions pertaining to Vishal Sikka's alleged personal lifestyle using company resources. It reads like a laundry list and deals with use of private charters, security of his home, renting office space in Palo Alto. I am not getting into the details of this, because it is not material to the treatise.

The whistleblower has further added that – Finally, when Mr. Ranganathan, the current CFO, assumed charge he put his foot down and told the board that the company had to recover all this as it is personal expenses. The Board, led by Mr Seshasayee, initially was reluctant to proceed with that. They asked Mr Ranganathan why the company should recover and thought he is unnecessarily raising these issues. Mr Seshasayee asked Mr Ranganathan whether there is any precedence in the company to recover such personal expenses to which Mr Ranganathan cited various instances where the founders incurred expenses from their own pocket if it was beyond company’s policies. Finally, the board reluctantly agreed to recover Rs 60 lakh from Mr Vishal Sikka post facto.

The severence payment to Mr Rajiv Bansal, ex-CFO of Infosys, was just negotiated between Mr Vishal Sikka and Mr David Kennedy, legal counsel. The Board was just informed and prior approval not taken. The payment was not approved by the Audit committee (since it pertained to the CFO); Nominations and Remuneration committee (since it pertains to key management personal salary); and the Board.

The final denouement comes with the following lines – The checks and balances required in any organisation are missing in Infosys. The investor community does not know about all these issues. If this continues, Infosys will go down as one of the worst governed companies in India. I am an employee of the company and as such in the know of all these things and willing to talk to the regulator and give all information. But, I want to be protected.

 Sikka’s response

Vishal Sikka’s unequivocal response to these allegations in February this year was – “a direct, reckless, malicious, slanderous and personal attack on me by diabolical minds. I will not tolerate it. It is unacceptable. If somebody attacks me personally, we will follow whatever legal recourse we have to after that.” Further on February 20, Infosys came out with a hard hitting statement refuting many of these allegations. In fact, it was a point by point rebuttal:

Infosys strongly refutes and denies the allegations made in the anonymous whistleblower letter that has been featured in today’s newspapers. The assertions made in the letter are libellous and are aimed at tarnishing the image of Infosys and its management.

We categorically state that no member of the Infosys management team was involved in any prior investments in Panaya, and insinuations that anyone from the management team at Infosys benefitted from this acquisition are misleading and slanderous.

Regardless of the malicious intent of this anonymous letter, the company will pursue its normal course of action and investigate the charges made. As stated before, we will respond to all queries received either directly or from the regulatory authorities, as per our process.

In addition, we would like to clarify the following with regard to points raised in relation to Panaya’s acquisition:

Infosys has a strong, established internal process to evaluate acquisition targets and make investments. In the case of Panaya, all the requisite steps in this process were followed. The valuation was done by Deutsche Bank, the financial and tax due diligence was done by one of the Big four firms and legal diligence was done by a leading law firm – Kirkland & Ellis. The management presented the rationale behind the acquisition – including synergies and business potential to the Board, along with necessary reports and findings. The Board deliberated the acquisition, and unanimously approved the investment which was well within the valuation range determined by the evaluator.

The letter alleges that Infosys acquired Panaya at a 25 per cent margin to the valuation of Series E investor that came in on January 8, 2015. It should be noted that the Series E investor was a minority shareholder (less than 15 per cent) and was towards preferred stock, whereas Infosys’ acquisition in Panaya is for 100 per cent stake.

It should also be noted that the last investment (series E investment in January 8, 2015) in Panaya was not a strategic investment whereas Infosys’ investment in Panaya was a strategic investment and we had significant synergies in acquiring a controlling stake in Panaya.

The valuation of investment in preferred stock vs 100 per cent strategic acquisition cannot and should not be compared. In addition, there is a premium for acquiring a controlling stake.

The allegation that the $20 million invested in Panaya before the acquisition was taken out and distributed to the shareholders is also untrue. At the time of its acquisition, Panaya had a cash balance of $18.6m / Rs 116 crore (this is evidenced in our disclosures in the 20F/Annual Report – additional information for the year ended March 31, 2015).

It is further alleged that the cash balance in Panaya came down from Rs 127 crore in 2014 to Rs 1.37 crore in 2015. It should be noted that these balances represent only one entity of Panaya. Panaya has four legal entities (Panaya Inc., Panaya limited, Panaya GMBH and Panaya Japan – financials for all of these entities are available on our website) and we should look at consolidated cash balances and not selectively look at only one entity. The balances of these four entities as of 2014 amounted to Rs 143 crore net of borrowings of Rs 30 crore and Rs 122 crore in 2015. It should also be noted that as part of the acquisition, we required Panaya to repay the borrowings and therefore the cash at the time of acquisition was Rs 116 crore ($18.6m). Further, no loans have been given by Infosys to any of Panaya’s entities post acquisition.

The fact that Dr Hasso Plattner was an investor in Panaya is public knowledge and the Board was well aware of the same, as well as of Dr Vishal Sikka’s association with SAP. Panaya was looked at as an acquisition candidate based on its strategic fit. There is absolutely no conflict of interest due to Dr Sikka’s past professional association with Dr Plattner.

Then why did Sikka succumb to Murthy's pressure, is the question that killed the cat.

Sandeep Bamzai