Adeel Halim/Bloomberg News
Ramalinga Raju, chairman of Satyam Computer Services, resigned Wednesday after disclosing he had systematically falsified accounts of the giant outsourcing company.
NEW DELHI â€” Satyam Computer Services, a leading Indian outsourcing company that serves more than a third of the Fortune 500 companies, significantly inflated its earnings and assets for years, the chairman and co-founder said Wednesday, roiling Indian stock markets and throwing the industry into turmoil.
The chairman, Ramalinga Raju, resigned after revealing that he had systematically falsified accounts as the company expanded from a handful of employees into a back-office giant with a work force of 53,000 and operations in 66 countries.
Mr. Raju said Wednesday that 50.4 billion rupees, or $1.04 billion, of the 53.6 billion rupees in cash and bank loans the company listed as assets for its second quarter, which ended in September, were nonexistent.
Revenue for the quarter was 20 percent lower than the 27 billion rupees reported, and the companyâ€™s operating margin was a fraction of what it declared, he said Wednesday in a letter to directors that was distributed by the Bombay Stock Exchange.
Satyam serves as the back office for some of the largest banks, manufacturers, health care and media companies in the world, handling everything from computer systems to customer service. Clients have included General Electric, General Motors, NestlÃ© and the United States government. In some cases, Satyam is even responsible for clientsâ€™ finances and accounting.
The revelations could cause a major shake-up in Indiaâ€™s enormous outsourcing industry, analysts said, and may force many large companies to investigate and perhaps revamp their back offices.
â€œThis development is going to have a major impact on Satyamâ€™s business with its clients,â€ said analysts with Religare Hichens Harrison on Wednesday. In the short term â€œwe will see lot of Satyamâ€™s clients migrating to competition like Infosys, TCS and Wipro,â€ they said. Satyam is the fourth-largest outsourcing firm after the three named.
In the four-and-a-half page letter distributed by the Bombay stock exchange, Mr. Raju described a small discrepancy that grew beyond his control. â€œWhat started as a marginal gap between actual operating profit and the one reflected in the books of accounts continued to grow over the years. It has attained unmanageable proportions as the size of company operations grew,â€ he wrote. â€œIt was like riding a tiger, not knowing how to get off without being eaten.â€
Mr. Raju said he had tried and failed to bridge the gap, including an effort in December to buy two construction firms in which the companyâ€™s founders held stakes. Speaking of a â€œdeep regretâ€ and a â€œtremendous burden,â€ Mr. Raju said that neither he nor the co-founder and managing director, B. Rama Raju, had â€œtaken one rupee/dollar from the company.â€ He said the board had no knowledge of the situation, nor did his or the managing directorâ€™s families.
The size and scope of the fraud raises questions about regulatory oversight in India and beyond. In addition to India, Satyam has been listed on the New York Stock Exchangesince 2001, and on Euronext since January of 2008. The company has been audited by PricewaterhouseCoopers since its listing on the New York Stock exchange.
Satyam has been under close scrutiny in recent months, after an October report that the company had been banned from World Bank contracts for installing spy software on some World Bank computers. Satyam denied the accusation but in December, the World Bank confirmed without elaboration on the cause that Satyam had been banned. Also in December, Satyamâ€™s investors revolted after the company proposed buying two firms with ties to Mr. Rajuâ€™s sons.
On Dec. 30, analysts with Forrester Research warned that corporations that rely on Satyam might ultimately need to stop doing business with the company. â€œFirms should take the initial steps of reviewing the exit clauses in their current Satyam contracts,â€ in case management or direction of the company changed, Forrester said.
The scandal raised questions over accounting standards in India as a whole, as observers asked whether similar problems might lie buried elsewhere. The risk premium for Indian companies will rise in investorsâ€™ eyes, said Nilesh Jasani, India strategist at Credit Suisse.
R. K. Gupta, managing director at Taurus Asset Management in New Delhi, told Reuters: â€œIf a companyâ€™s chairman himself says they built fictitious assets, who do you believe here?â€ The fraud has â€œput a question mark on the entire corporate governance system in India,â€ he said.
News of the scandal â€” quickly compared with the collapse of Enron â€” sent jitters through the Indian stock market, and the benchmark Sensex index fell more than 5 percent. Shares in Satyam fell more than 70 percent.
Just a few months ago, Mr. Raju was trying to persuade investors that the company was sound. In October, he surprised analysts with better-than-expected results, saying he was â€œpleasedâ€ that the company had â€œachieved this in a challenging global macroeconomic environment, and amidst the volatile currency scenario that became reality.â€
But by late December, it seems he had little support from the board or investors, and four of the companyâ€™s directors resigned in recent weeks. Satyam recently retained Merrill Lynch for strategic advice, a move that is generally a precursor to a sale.
Mr. Raju said in his statement that he â€œsincerely apologizedâ€ to shareholders and employees and asked them to stand by the company. â€œI am now prepared to subject myself to the laws of the land and face consequences thereof,â€ he said.