Satyam Software Scandal Hits Indian Outsourcing
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The head of Indian outsourcing firm Satyam Computer Services resigned on Wednesday, disclosing that profits had been falsely inflated for years and sending its shares tumbling nearly 80 percent.
India's biggest corporate scandal in memory threatens future foreign investment flows into Asia's third-largest economy and casts a cloud over growth in its once-booming outsourcing sector.
The news sent Indian equity markets into a tailspin, with Bombay's main benchmark index tumbling 7.3 percent in a firmer session for world markets and the Indian rupee fell.
Ramalinga Raju, founder and chairman of India's fourth-largest software services exporter, said in a statement that Satyam's (NYSE: SAY) profits had been massively inflated over recent years but no other board member -was aware of the financial irregularities.
"If a company's chairman himself says they built fictitious assets, who do you believe here? This has put a question mark on the entire corporate governance system in India," said R.K. Gupta, managing director at Taurus Asset Management in New Delhi.
Raju, who founded Satyam more than two decades ago and who took it public in 1991, said about $1 billion or 94 percent of the cash on the company's books was fictitious.
The 54-year-old Satyam chairman came under close scrutiny last month after the company's botched attempt to buy two construction firms partly owned by its founders, which Raju said on Wednesday was a final attempt to resolve the problem of the fictitious assets.
"It was like riding a tiger, not knowing how to get off without being eaten," Raju, a management graduate from Ohio University, said in his letter, adding he was prepared to face up to the legal consequences.
Satyam said its managing director and co-founder B. Rama Raju, Raju's brother, had also resigned. It did not give any reason for the resignation.
The company's difficulties multiplied when the World Bank, a major customer, barred Satyam from new business, citing "improper benefits" given to Bank officials.
"In a bull market people forgot about [corporate governance]," said Singapore-based Ashish Goyal, chief investment officer at Prudential Asset Management. "In a bear market chickens are coming home to roost, so it gets highlighted at a time like this."
Just three months ago, Satyam received a Golden Peacock award from a group of Indian directors for excellence in corporate governance.
By close of trade, Satyam's share value slumped to about $550 million from around $7 billion as recently as last June.
New York-listed Satyam specializes in business software and back-office services for clients such as General Electric and Nestle.
"I think there is no future for this stock. This case for India is similar to what happened to Enron in the U.S.," said Jigar Shah, senior vice-president at Kim Eng Securities.
"It will not stop at Satyam. Many more companies will come into scrutiny like that. There is a strong possibility investments in India will be affected."
The scandal set off a wave of condemnation from Indian market regulators and government officials, and prompted banker Merrill Lynch to terminate its engagement with Satyam.
"It's going to impact the Indian outsourcing industry. Customers are going to be concerned about offshoring firms in India," said Sudin Apte, country head of Forrester in the western city of Pune.
Satyam said it would go ahead with a planned board meeting on Saturday to consider a share buyback following a rash of broker downgrades even after its acquisitions were called off last month.