Satyam Chairman Resigns After Falsifying Accounts

Satyam Computer Services Ltd. Chairman Ramalinga Raju resigned after saying he falsified earnings and assets, prompting a collapse in the stock of India’s fourth- largest software services provider.

Raju unsuccessfully tried to sell two companies to Satyam last month in a final attempt to plug 50.4 billion rupees ($1.04 billion) of “fictitious” cash on the company’s balance sheet, he wrote in a letter to Hyderabad-based Satyam’s board today. Profits have been inflated for “several years,” he said.

Satyam, which means “truth” in Sanskrit, plunged in New York trading, after earlier dragging down India’s benchmark index, in a scandal described as “horrifying” by markets regulator C.B. Bhave. Raju’s reign unraveled in the past month as a shareholder revolt blocked the asset purchases, the World Bank banned Satyam from bidding for contracts and four directors quit.

“This is a black day for India, the software sector and corporate governance claims,” Arun Kejriwal, founder of Kejriwal Research & Investment Services, said in Mumbai. “If at all there’s an event that could be the biggest setback for corporate India, it is this.”

Goldman Sachs Group Inc., Citigroup Inc., HSBC Holdings Plc, and Credit Suisse Group AG suspended coverage of Satyam, which slumped a record 78 percent in Mumbai. Bombay Stock Exchange spokesman Kalyan Bose said the bourse will examine whether to remove Satyam from the Sensitive Index after the benchmark tumbled 7.3 percent.

Satyam’s American depositary receipts fell $7.84, or 84 percent, to $1.51 at 7:34 a.m. in early New York trading.

‘Deep Shock’

“We’re in a deep state of shock by what’s been announced and we’re fairly happy that we sold when we did,” said Greg Kuhnert, a fund manager at Investec Asset Management Ltd. in London, which manages about $10 billion and sold its 0.15 percent stake in Satyam last month. “When we look at further investments in the country, we’ll have to get out a magnifying glass and really examine every bit very closely.”

Satyam maintains computer networks and provides outsourcing services for clients including Citigroup Inc., Nissan Motor Co. and Qantas Airways Ltd. The company employs about 53,000 people in Bangalore, Chennai and Hyderabad and competes with Infosys Technologies Ltd., Tata Consultancy Services Ltd. and Wipro Ltd.

“This quarter will be tumultuous for us,” interim Chief Executive Officer Ram Mynampati said in an e-mailed statement. “Rumors will abound and it would be fair to assume that competition will try to leverage it to their advantage.”

Infosys, India’s second-largest software exporter, called the incident “deplorable.”

‘Non-Existent’

Of Satyam’s reported cash and bank balances of 53.61 billion rupees on Sept. 30, 50.4 billion rupees was non-existent, Raju said in the letter sent to the Bombay Stock Exchange.

Operating margin in the quarter ended Sept. 30 was 3 percent of revenue, instead of the reported 24 percent, Raju said. The company’s revenue was 21 billion rupees, 22 percent less than the inflated figure of 27 billion rupees that had been reported.

Raju arranged 12.3 billion rupees “to keep operations going” at Satyam over the last two years by pledging the founders’ shares and raising funds from other sources, he said.

“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,” Raju said. “It was like riding a tiger, not knowing how to get off without being eaten.”

Brother Quits

Rama Raju, the outgoing chairman’s younger brother and Satyam’s managing director, also resigned, the company said.

The founders’ concern was that a poor performance, combined with the fact they held a small stake in the company, would make Satyam an easy target for a takeover, exposing the inflated figures, he said.

Raju’s attempts to “keep the wheel moving” at Satyam was finally derailed as lenders sold most of the pledged shares because of margin calls, he said.

Satyam’s auditors PricewaterhouseCoopers said in an e-mail it will issue a statement later.

Raju scrapped the planned acquisition of Maytas Properties Ltd. and Maytas Infra Ltd. last month, less than 12 hours after announcing it, after the company’s ADRs plunged.

Separately, the World Bank Dec. 23 declared India’s fourth- biggest software-services provider ineligible for contracts for eight years from September, alleging “improper” benefits were given to the bank’s employees.

DSP Merrill Lynch Ltd. said it ended its contract with Satyam yesterday. The software provider had on Dec. 27 named Merrill as an adviser for helping it on strategic “options” including a possible stake sale.

Raju, who won the Ernst & Young Entrepreneur of the Year award in 2007, has an MBA from Ohio University and is an alumnus of Harvard Business School, according to Satyam’s Web site.

Satyam in September was awarded the Golden Peacock Global Award for Excellence in Corporate Governance by the London-based World Council for Corporate Governance.

“We’re planning to withdraw the branding,” said Manoj Raut, a New Delhi-based spokesman at the Golden Peacock Awards Secretariat. “The council will be meeting shortly to check the legal perspectives and how to go about it.”

“This company had a five-star independent board and it had a leading auditor and still it managed the con,” said Tarun Sisodia, a Mumbai-based analyst with Anand Rathi Securities Ltd. “So the question is why only Satyam, why not every other company.”


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