MUMBAI, January 7 – The head of one of India\’s biggest outsourcing firms, Satyam Computer, resigned on Wednesday amid a scandal over a billion dollar fraud that sent company stocks into freefall.
Company founder and chairman B. Ramalinga Raju admitted the Hyderabad-based software services firm had falsified accounts and assets and inflated its profits over several years.
The company overstated its cash and bank balances to the tune of more than 50 billion rupees (more than a billion dollars) in its September-end balance sheet, "purely on account of inflated profit over a period of several years," Raju said in a statement.
Satyam shares plummeted 77.69 percent, or 139.15 rupees, to 39.95 rupees on the Mumbai Stock Exchange on Wednesday, as investors dumped the company.
The broader benchmark 30-share Sensex plunged 7.25 percent to 9,586.88.
Satyam — a leading software consultancy, system integration and outsourcing firm with clients across 65 countries — had announced the 1.6-billion-dollar buyout of the Maytas infrastructure firm earlier this month, but abruptly reversed its decision after investors rejected the plan.
Raju admitted in the statement that the Maytas acquisition plan was "the last attempt to fill fictitious assets with real ones."
Analysts and the stock market regulator have reacted with shock at the fraud and major brokerages have suspended ratings for the stock.
"This is an event of horrifying magnitude and it\’s first of its kind," C B Bhave, chairman of market regulator Sebi, told the Press Trust of India.
"We are in touch with ministry of corporate affairs… we are also in discussion with them as to what steps need to be taken," Bhave said.
"This is alarming and disturbing… like a punch which catches you unawares. The fraud will have an impact over the short-term," Bharat Iyer, India strategist with J P Morgan, told AFP.
The investment bank had already placed a "sell" rating for the stock because of the global economic slowdown.
"The Satyam management\’s continuance seems to be untenable regardless of the new board composition. What this sorry episode has done is leave a huge hole in corporate governance at Satyam," said Viju George, analyst at Edelweiss Securities, in a report to clients.
"It is one of the worst days for Indian investors as a truly shocking and mind-numbing development," said Hitesh Agrawal, head of research with Angel Broking, in a report titled "India\’s Enron".
"We see a lot of Satyam\’s clients migrating to competition like Infosys, TCS and Wipro," said an analyst with brokerage Religare Hichens Harrison.
"Indian corporate governance standards have been put at stake here, the role of the auditors have also come under serious question," Hitesh added.
A company\’s books of accounts, signed by the board, is approved by auditors before being sent to financial regulators and tax authorities.
A spokesman for India\’s second largest software exporter Infosys, which rivals Satyam for outsourcing deals, said it was "shocked and dismayed."
"The whole incident is deplorable… the government and regulators must make necessary changes to regulations so that such incidents do not happen in future," he said.
The Satyam chief apologised "to all Satyamites and stakeholders, who have made Satyam a special organisation, for the current situation."
"I am now prepared to subject myself to the laws of the land and face consequences thereof," Raju added.
"This incident is particularly unfortunate. It is however a stand-alone case of failure of corporate governance," said a statement from an IT lobby group, the National Association of Software and Services Companies (NASSCOM).
The Satyam management is expected to meet shortly in the wake of the fraud, media reports said.
"We are shocked by the contents of his (chairman\’s) letter. We will meet shortly to strategise a way forward in the wake of the fraud," Satyam\’s interim chief executive Ram Mynampati said.
Late last year the World Bank barred Satyam from doing business with it for eight years over "improper benefits" paid to staff.