Satyam Chairman Resigns After Falsifying Accounting
By Harichandan Arakali
Jan. 7 (Bloomberg) -- Satyam Computer Services Ltd. Chairman Ramalinga Raju resigned after saying he falsified earnings and assets, prompting a collapse in the stock of India’s fourth-largest software-services provider.
Raju unsuccessfully tried to sell two companies to Satyam last month in a final attempt to plug 50.4 billion rupees ($1.03 billion) of “fictitious” cash on the company’s balance sheet, he wrote in a letter to Hyderabad-based Satyam’s board today. Profits have been inflated for “several years,” he said.
Satyam, which means “truth” in Sanskrit, slumped a record 78 percent in Mumbai trading, dragging down India’s benchmark index, in a scandal that was described as “horrifying” by markets regulator C.B. Bhave. Raju’s reign unraveled in the past month as shareholders blocked the asset purchases, a World Bank ban kept Satyam from bidding for orders and four directors quit.
“This is a black day for India, the software sector and corporate-governance claims,” Arun Kejriwal, founder of Kejriwal Research & Investment Services, said in Mumbai. “If at all there’s an event that could be the biggest setback for corporate India, it is this.”
Goldman Sachs Group Inc., Citigroup Inc., HSBC Holdings Plc, and Credit Suisse Group AG suspended coverage of Satyam. The National Stock Exchange removed Satyam from its main Nifty index after the benchmark slumped 6.2 percent.
Satyam’s American depositary receipts fell $8.42, or 90 percent, to 93 cents in trading before the opening of the New York Stock Exchange. The shares were then halted by the exchange, which said it is evaluating the news.
“We’re in a deep state of shock by what’s been announced and we’re fairly happy that we sold when we did,” said Greg Kuhnert, a fund manager at Investec Asset Management Ltd. in London, which manages about $10 billion and sold its 0.15 percent stake in Satyam last month. “When we look at further investments in the country, we’ll have to get out a magnifying glass and really examine every bit very closely.”
Satyam maintains computer networks and provides outsourcing services for clients such as Citigroup, Nissan Motor Co. and Qantas Airways Ltd. The company employs about 53,000 people in Bangalore, Chennai and Hyderabad, and competes with Infosys Technologies Ltd., Tata Consultancy Services Ltd. and Wipro Ltd.
“This quarter will be tumultuous for us,” interim Chief Executive Officer Ram Mynampati said in an e-mailed statement. “Rumors will abound and it would be fair to assume that competition will try to leverage it to their advantage.”
Infosys, India’s second-largest software exporter, called the incident “deplorable.”
Of Satyam’s reported cash and bank balances of 53.61 billion rupees on Sept. 30, 50.4 billion rupees was nonexistent,
Raju said in the letter sent to the Bombay Stock Exchange.
Satyam’s operating margin in the quarter ended Sept. 30 was 3 percent of revenue, instead of the reported 24 percent, Raju said. The company had sales of 21 billion rupees, 22 percent less than the stated figure of 27 billion rupees.
Raju arranged 12.3 billion rupees “to keep operations going” at Satyam during the past two years by pledging the founders’ shares and raising funds from other sources, he said.
“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,” Raju said. “It was like riding a tiger, not knowing how to get off without being eaten.”
Rama Raju, the outgoing chairman’s younger brother and Satyam’s managing director, also resigned, the company said.
The founders’ concern was that poor performance, combined with the fact that they held a small stake in the company, would make Satyam an easy target for a takeover, exposing the inflated figures, he said.
Raju’s attempts to “keep the wheel moving” at Satyam was finally derailed as lenders sold most of the pledged shares because of margin calls, he said.
Satyam’s auditor PricewaterhouseCoopers LLC is examining the statement made by Raju and declined to comment further, the firm said in an e-mail, citing client confidentiality.
Prem Chand Gupta, minister for company affairs, said the government is investigating the incident. “There will be no leniency in dealing with this case,” he said in New Delhi.
The Securities and Exchange Board of India ordered a probe into trading in Satyam shares, the agency said on its Web site. Bombay Stock Exchange spokesman Kalyan Bose said the bourse will examine whether to remove Satyam from the Sensitive Index.
Maytas, World Bank
John Heine, a spokesman for the U.S. Securities and Exchange Commission, said he wasn’t authorized to confirm or deny whether the agency was investigating Satyam.
Raju scrapped the planned acquisition of Maytas Properties Ltd. and Maytas Infra Ltd. last month, less than 12 hours after announcing it, following a drop in the company’s ADRs.
Separately, the World Bank declared on Dec. 23 that the company was ineligible for contracts for eight years starting in September, alleging that improper benefits were given to the bank’s employees.
DSP Merrill Lynch Ltd. said it ended its contract with Satyam yesterday. The software provider had on Dec. 27 named Merrill as an adviser for helping it on strategic “options,” including a possible stake sale.
Vianale & Vianale, a law firm in Boca Raton, Florida, said today that it filed a class action lawsuit against Satyam and its top executives. Satyam spokesman Jim Swords declined to comment.
Raju, who won the Ernst & Young Entrepreneur of the Year award in 2007, has an MBA from Ohio University and is an alumnus of Harvard Business School, according to Satyam’s Web site.
In September, Satyam was awarded the Golden Peacock Global Award for Excellence in Corporate Governance by the London-based World Council for Corporate Governance. The council today withdrew the award.
“This company had a five-star independent board and it had a leading auditor and still it managed the con,” said Tarun Sisodia, a Mumbai-based analyst with Anand Rathi Securities Ltd. “So the question is, why only Satyam, why not every other company?”
To contact the reporter on this story: Harichandan Arakali in Bangalore at email@example.com