Chairman of 'India's Enron' Resigns After Falsifying Financial Data

Editor's note: A version of this story originally appeared in the Wall Street Journal.

Satyam Computer Services Ltd. Chairman B. Ramalinga Raju resigned Wednesday, admitting to falsifying company accounts and inflating revenue and profit figures over several years, sending the company's shares plunging 78 percent.

The chairman's move came only weeks after the World Bank admitted, in the wake of a series of stories by FOX News, that it had banned the information giant as a vendor last February for improper financial dealings with a top bank official.

In a letter to the company's board, which was released to the Bombay Stock Exchange, Raju said Satyam had inflated its operating profit for the three months ended Sept. 30 to 6.49 billion rupees ($136 million) from 610 million rupees reported previously, while revenue was inflated to $565 million from $443 million. It had reported an operating margin of 24 percent which was actually 3 percent.

Raju also said Satyam's balance sheet as of Sept. 30 had a non-existent cash balance of over $1 billion; nonexistent accrued interest of $79 million; an understated liability of $258 million; and an overstated debtor position of $103 million compared with $555 million reflected in its books.

"This has resulted in artificial cash and bank balances going up by $123 million in the second quarter alone," said the executive.

The latest revelation comes after Satyam raised investors' wrath Dec. 16 when it announced it was planning to buy out Maytas Properties Ltd. and acquire a 51 percent stake in Maytas Infra Ltd. — two companies in which its founders Chairman Raju and his brother, Managing Director B. Rama Raju, have stakes. But a few hours later, it canceled the plan after analysts and shareholders criticized the move.

Since then, shares in Satyam have plunged on concerns about corporate governance, and the company announced the resignation of four directors, bringing its current board size to five from nine. The Hyderabad-based company also said last month it planned hold a board meeting Saturday to consider strategic options to enhance shareholder value, raising speculation it would seek to merge with another software company.

But that plan is now in question as DSP Merrill Lynch, which was appointed by the company to advise on strategic options ahead of the board meeting, said it had terminated its engagement with the company.

"The aborted Maytas deal was the last attempt to fill the fictitious assets with real ones," Mr. Raju said. "I am now prepared to subject myself to the laws of the land and face consequences thereof."

The founders' concern was the company would become a takeover target if its poor performance were exposed, given that they held a small stake in the company, he said.

Earlier in the day, Satyam said that its founders' stake has fallen to 3.6 percent from 5.1 percent after institutional lenders sold the stock.

Mr. Raju said that none of its board members or senior executives had knowledge of the company's falsified financial results. Managing Director B. Rama Raju also resigned his post.

"We are obviously shocked by the contents of the letter. The senior leaders of Satyam stand united in their commitment to customers, associates, suppliers and all shareholders," Ram Mynampati, board member — whose appointment as interim chief executive is pending ratification by the board — said in a separate statement.

Mr. Mynampati said Satyam's immediate priorities are to protect the interests of its shareholders, the careers of its roughly 53,000 employees, and meet all its commitments to its customers and suppliers.

Since 2003, according to FOX News sources, the World Bank has paid Satyam hundreds of millions of dollars to write and maintain all the software used by the bank throughout its global information network, including its back-office operations — overseeing data that ranges from accounting and personnel records to trust funds administered for many of the world's richest nations.

Questions about Satyam first began to arise last October, when FOX News reported that sources at the World Bank had disclosed that one or more Satyam contractors were involved in a series of unprecedented cyber assaults on the world's foremost anti-poverty organization. World Bank officials vehemently denied the story.

Click here for the original FOX News story.

On Nov. 2, FOX News reported that hundreds of former Satyam employees were still working at the World Bank, despite the fact that the company had been ordered off World Bank premises by the institution's president, Robert Zoellick.

Click here for that story.

Finally, on Dec. 22, FOX News revealed that the World Bank had admitted in a series of secret meetings that it had formally banned Satyam as a vendor for eight years, starting in February, 2008, for improperly selling preferential shares to the World Bank's top information technology officer.

Click here for that story.

Along with the World Bank, Satyam's clients include General Electric Co., General Motors Corp., Nissan Motor Co., Applied Materials Inc., Caterpillar Inc., Cisco Systems Inc. and Sony Corp.

A Nissan spokeswoman said the company had no current plan to cancel its outsourcing partnership with Satyam but would closely watch the situation.

Sony confirmed that the company has a business relationship with Satyam but a spokesman gave no further comment.

Satyam will cooperate with relevant regulatory authorities to investigate this matter, Mynampati said.

"Satyam is now India's Enron. The independence of the board was already in question, now the auditors' complicity in what seems to be a multi-year misstatement of financials will also be explored," CLSA said in a note.

Price Waterhouse, which is the company's auditor, said it will issue a statement later Wednesday.

The chairman of the Securities and Exchange Board of India said Wednesday the unfolding fraud at Satyam is an event of "horrifying magnitude."

"Our main efforts are to make sure whatever facts are available with any regulatory agency are put out, and investors know the truth," C. B. Bhave said in an interview with local business television channel, CNBC TV18. Mr. Bhave said the country's capital markets regulator is in touch with the Ministry of Corporate Affairs, adding that there is a need for coordinated action on the issue.

P.C. Gupta, the federal minister for company affairs, described the Satyam fiasco as a "shameful act." He said that government will take coordinated action with the Securities and Exchange Board of India, or SEBI.

Shares in India's fourth largest software exporter by revenue, closed down 77.7 percent to 84 cents on the Bombay Stock Exchange, pulling the benchmark index down 7.3 percent.

"This is a monumental scandal. It is terrible for the Indian IT industry," said Jagdish Malkani, country head at TAIB Capital Corp.

Analysts said it was far too soon to say how much further Satyam shares might fall, though they predicted a continued impact on the tech sector and the market as a whole.

"This shakes the very confidence of investors in corporates. The company had (inflated its profit and revenue) and yet the auditors had no clue of the damage. The fear now is investors will disown the stock," said Deven Choksey, managing director of Mumbai-based K.R. Choksey Shares and Securities.

However Porinju Veliyath, director at Equity Intelligence, said "investors trapped with Satyam shares probably should not sell the stock now, as the government's priority will be to save Satyam because of its large" staff of 50,000 or so."

Click here for more from the Wall Street Journal.