Chairman resigns after revealing "non-existing" cash
Shares of Satyam Computer Services crashed 77% in Mumbai Wednesday, after the founder and chairman of India's fourth-largest software company resigned, saying the company had inflated its cash and bank balances on the balance sheet by more than $1 billion.
Chairman B. Ramalinga Raju said the balance sheet as of Sept. 30 had inflated non-existing cash and bank balances of 50.40 billion rupees ($1.04 billion), understated a liability of 12.3 billion rupees, and overstated debtors' position of 4.9 billion rupees.
In a letter to the board, made available to the stock exchange, Raju wrote that he was making the announcement "with deep regret, and tremendous burden that I am carrying on my conscience."
"The gap in the balance sheet has arisen purely on account of inflated profits over a period of last 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," he said.
"I am now prepared to subject myself to the laws of the land and face consequences thereof," Raju added.
A Satyam founding family member and managing director, B. Rama Raju, also resigned.
Shares of Satyam (SAY:
9.35, +0.36, +4.0%) , a constituent of the 30-stock benchmark Sensex, ended down 77%, dragging down the Sensex by 7.3% to 9,586.88. Satyam's New York-listed American Depository Receipts plunged 75% to $2.38 in pre-market trade. See related story.
Both Ramalinga Raju and Rama Raju will "continue to serve in the position only till such time the current board is expanded and the continuance is just to ensure enhancement of the board over the next several days or as early as possible," Satyam separately informed the stock exchange.
The founders held 8.61% in Satyam as of Sept. 30.
Among other large Satyam shareholders, Aberdeen Asset Management (UK:ADN: news , chart , profile ) held a 9.2% stake through various funds as of Oct. 10, while Fidelity Investments, the world's top fund manager, was the third-largest holder with a stake of over 4%, according to FactSet.
In particular, Fidelity's Diversified International Fund (FDIVX:
21.88, +0.25, +1.2%) held 23 million shares as of Oct. 31.
Shock
Market participants as well as regulators expressed shock over the incident at one of India's best-known companies overseas. The incident also raised fears that India's largest corporate fraud to date will impact other companies and foreign investment. Read story about "India's Enron"
"It's a major blow to sentiment," said Gurunath Mudlapur, managing director at Atherstone Capital Market in Mumbai. "Market sentiment had just about started to improve after a long period of time, but with this development, the confidence is again getting shattered."
Chairman C.B. Bhave of the Securities and Exchange Board of India was quoted by local TV channels as describing Satyam's announcement as an event of "horrifying magnitude," according to a published report.
"Our main efforts are to make sure that whatever facts are available with any regulatory agency are [disclosed], and investors know the truth," Bhave told CNBC TV18 business news channel, Dow Jones Newswires reported.
In a statement issued separately in the afternoon, Ram Mynampati, Satyam's interim chief executive, also expressed shock. He added the company's immediate priorities were to protect the interest of shareholders and the company's 53,000 employees.
Rivals benefit
Of the other Sensex constituents, Icici Bank (IBN:
22.00, +1.00, +4.8%) tumbled 10.5%, market heavyweight Reliance Industries sank 12.5%, and Reliance Communications skidded 17%.
Shares of other software majors outperformed the broad market, however, with Tata Consultancy Services dropping 0.8% and Wipro (WIT:
8.41, +0.08, +1.0%) rising 0.2%, while Infosys Technologies (INFY:
26.60, +0.61, +2.4%) climbed 1.7%.
At their Mumbai closing price Wednesday, Satyam shares are down 82% from its closing price on Dec. 16, when it announced plans to acquire two infrastructure companies managed by the company's founders.
The company canceled the takeover plan within 24 hours after the shares tumbled, but the move hurt the company's credibility, built over the last 21 years since the company was founded in 1987.
Its image was hurt further last month, when the World Bank barred the company for eight years from bidding for contracts, alleging the software company had given "improper" benefits to its employees.
