Satyam Chairman Admits Accounting Fraud

In a letter to the company's board, which was released to the Bombay Stock Exchange, Raju said that Satyam had inflated its operating profit for the three months ended Sept. 30 to INR6.49 billion ($136 million) from INR610 million reported previously, while revenue was inflated to INR27 billion from INR21.12 billion. It had reported an operating margin of 24% which was actually 3%.

Raju also said Satyam's balance sheet as of Sept. 30 had a non-existent cash balance of INR50.4 billion; non-existant accrued interest of INR3.76 billion; an understated liability of INR12.30 billion; and an overstated debtor position of INR4.90 billion compared with INR26.51 billion reflected in its books.

"This has resulted in artificial cash and bank balances going up by INR5.88 billion in the second quarter alone," said the executive.

The latest revelation comes after Satyam raised investors' wrath when it announced Dec. 16 it was planning to buy out Maytas Properties Ltd. and acquire a 51% stake in Maytas Infra Ltd. -- two companies in which its founders Chairman Raju and his brother, Managing Director B. Rama Raju, have stakes in. 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," 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 was 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% from 5.1% after institutional lenders sold the stock.

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.

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.

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.

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% to INR39.95 on the Bombay Stock Exchange, pulling the benchmark index down 7.3%.

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

The news had a ripple effect on the sector with the 14-stock BSE IT Index closing down 9.3% at 2,128.16.

But IT majors Wipro Ltd. and Infosys Technologies Ltd. bucked the trend on hopes of gaining clients from Satyam. Wipro ended 0.6% higher at close to INR243.30, while Infosys Technologies gained 1.7% to close at INR1187.10.

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."

-- Romit Guha, Dow Jones Newswires

(John Satish Kumar contributed to this story.)