The Satyam Fraud -1: India’s biggest corporate scandal in history! Satyam chief resigns, admitting 823-million-dollar fraud !!

Ramalinga Raju, chairman of Satyam Computer Services, told the Bombay Stock Exchange that he did not profit from the accounting problems he disclosed Wednesday. (Adeel Halim/Bloomberg News)

NEW DELHI: The chairman of Satyam Computer Services, a leading Indian information technology company that serves numerous Fortune 500 companies, resigned on Wednesday amid major accounting irregularities, roiling Indian markets and causing Satyam’s shares to plummet 78 percent.

Ramalinga Raju tendered his resignation after revealing that the company’s financial position had been massively inflated during the course of the company’s expansion from a handful of employees into an outsourcing giant with a workforce of 53,000 and operations in 66 countries. Of the 53.6 billion rupees in cash and bank balances the company reported at the end of its second quarter, which ended September 2008, 50.4 billion rupees were nonexistent, Raju said Wednesday.

In a four and a half page statement to the Bombay stock exchange, Raju described how the gap in the balance sheet had arisen on account of inflated profits over several years. “What 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,” his statement said.

Satyam provides systems and software, and serves as the back office for some of the largest banks, manufacturing and media companies in the world.

Clients include General Electric and General Motors. In some cases, the company is responsible for keeping track of clients’ own transactions with their customers, and the client’s own books.

Satyam, which in a separate statement said it was “shocked” by Raju’s revelations, has been listed on the NYSE since May of 2001, and listed on Euronext in January of last year. The company is audited by PricewaterhouseCoopers, which had no immediate comment.

Satyam has been under 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. In December, the World Bank confirmed that Satyam had been banned but did not elaborate on the cause.

Also in December, Satyam’s investors revolted after the company proposed buying two firms with ties to Raju’s sons. That acquisition, had been “the last attempt to fill the fictitious assets with real ones,” Raju said in his statement Wednesday.

The scandal has immediately raised questions over accounting standards in India as a whole, as observers asked themselves whether similar problems might lie buried elsewhere. The risk premium for Indian companies will rise in investors’ eyes, said Nilesh Jasani, India strategist at Credit Suisse.

News of the scandal – quickly dubbed India’s equivalent to the Enron scandal in the United States – sent jitters through the entire Indian stock market on Wednesday, sending the benchmark Sensex stock market index down 7 percent by late afternoon.

“This was a company which had the most high profile independent director.

It had an auditor of significant repute,” Tarun Siodia, head of research at Andand Rathi, told Reuters. “Despite that, if such an event can occur, then why not other companies? That is going to raise bigger issues.”

R.K. Gupta, managing director at Taurus Asset Management in New Delhi, also speaking to Reuters, echoed this: “If a company’s chairman himself says they built fictitious assets, who do you believe here? Not only Satyam, this has put a question mark on the entire corporate governance system in India.”

Just a few months ago, Raju was trying to convince investors that the company was sound. In October, he surprised investors with better than expected results, saying he was “pleased” that the company had “achieved this in a challenging global macroeconomic environment, and amidst the volatile currency scenario that became reality.” But by late December, it seems he had little support from board members or investors: Four of the company’s directors resigned in recent weeks.

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Also Read:

1) The Satyam Fraud -3: Letter From Interim CEO to the Employees

2) The Satyam Fraud -2: Letter from Mr. Ramalinga Raju to its Board of Directors!

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Related Links:

1) India’s Satyam chief resigns, admitting 823-million-dollar fraud: http://bit.ly/16gIv

2) India’s Satyam chief quits, says profits inflated: http://www.reuters.com/article/businessNews/idUSTRE50616H20090107?feedType=RSS&feedName=businessNews

3) Satyam chief resigns over inflated assets: http://www.iht.com/articles/2009/01/07/business/outsource.php

4) Satyam does an Enron! : http://mostlyeconomics.wordpress.com/2009/01/07/satyam-does-an-enron/

5) Satyam head quits after admitting massive fraud [Express Buzz]: http://bit.ly/LXmc

6) Satyam Chairman Resigns After Falsifying Accounts (Update1): http://www.bloomberg.com/apps/news?pid=20601080&sid=a37YOX1irBus&refer=asia