Satyam shares crashed. What will be the fate of 53,000 employees. This is India’s Enron… A Rs 7000 crore lie… Strange that the meaning of SATYAM is TRUTH and this was the largest-ever corporate fraid of India.
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.
Satyam’s New York-listed American Depositary Receipts plunged 75% to $2.38 in pre-market action Tuesday, but never opened for trading in the U.S. The New York Stock Exchange said it is “evaluating the news relating to Satyam and will continue to closely monitor further developments.” The security will remain halted until further notice.
B. Ramalinga Raju, Satyam’s chairman, 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. The founders held 8.61% in Satyam stock as of Sept. 30.
Among other large Satyam shareholders, Aberdeen Asset Management 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
One analyst said the stunning scandal throws more uncertainty into an already volatile business arena.
“Given that we’re in very volatile economic times already, news like this just adds more fuel to the fire,” said Gartner Inc. analyst Fran Karamouzis.
It also could raise the bar for other IT-services companies, even as Satyam’s woes create potential opportunities for such players as Accenture Ltd.
Karamouzis noted that IT-services companies may find themselves facing tougher scrutiny because of what happened at Satyam, as potential customers may begin to take into account a would-be vendor’s financial stability.
“If you’re a CIO [chief information officer] going into 2009 and you need to cut your budget to get more efficient and more bank for the buck, you want to get the best and most trusted adviser,” she said. “Usually they take financial stability as a given. Now they elevate that to a much higher priority.”
Accenture’s stock rose 1.1% Wednesday, while IBM shares were down 1.6%.
Shocked reactions
Satyam’s board, which convened in Hyderabad to discuss its next steps, said it received Raju’s resignation letter.
“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,” said board member Ram Mynampati, who was named interim CEO.
Market participants and regulators also expressed shock over the incident at one of India’s best-known companies. The incident also raised fears that India’s largest corporate fraud to date will impact other companies and foreign investment.
“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.
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At their Mumbai closing price Wednesday, Satyam shares are down 82% from their closing price on Dec. 16, when the company announced plans to acquire two infrastructure companies managed by Satyam’s founders.
The company canceled the takeover plan within 24 hours after the shares tumbled, but the move hurt the company’s credibility, built 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.
Varahabhotla Phani Kumar is a reporter in MarketWatch’s Hong Kong bureau
