Satyam chairman resigns amid $1bn fraud

http://business.timesonline.co.uk/tol/business/industry_sectors/technology/article5464908.ece

January 7, 2009
Satyam chairman resigns amid $1bn fraud
Rhys Blakely in Mumbai

One of India's biggest-ever corporate scandals took a sensational new turn today when the chairman of Satyam, the IT services giant, admitted he had orchestrated a $1billion (£669 million) fraud, and resigned.

B. Ramalinga Raju, the founder and chairman of Satyam, which means "truth" in Sanskrit, said in a letter to the board that he had wildly inflated the company’s profitability for several years.

This resulted in 50.4 billion rupees ($1 billion) worth of "fictitious” cash on the company’s balance sheet at the end of September.

"It was like riding a tiger, not knowing when to get off without being eaten," Mr Raju said, describing how the fraud, which he claimed had begun as an effort to smooth over a minor accounting discrepancy, had "attained unmanageable proportions as the size of the company operations grew".

The Satyam scandal will further stoke concerns about the state of corporate governance in India. Overseas investors have already voiced fears that the country's regulators regularly fail to police improper behaviour.

CB Bhave, the chairman of the Securities and Exchange Board of India, the markets watchdog, said: "This event is a first of its kind in India. We have a lot to learn."

The company is listed in Mumbai and New York, and a US investigation could also follow. Under particular scrutiny will be the role of PricewaterhouseCoopers, Satyam's auditor.

Mr Raju has been facing a wave of investor hostility since December 16 when he announced that Satyam would spend $1.6 billion taking over two struggling property development businesses - Maytas Properties and Maytas Infra - that were owned largely by him and were run by his sons.

He was forced to drop the deal, which had been approved by the company's board, just hours later after India's usually sedate institutional investors stockholders threatened to derail the acquisition by any means possible.

Most shareholders had assumed that Mr Raju was attempting to plunder Satyam's cash pile. He has subsequently said the acquisitions were part of a last ditch plot "to fill [Satyam's] fictitious assets with real ones".

A week later, the World Bank said that it had blacklisted Satyam, India's fourth-biggest software-services provider, for eight years, alleging that improper benefits had been offered to the bank's employees.

Mr Raju insisted that he did not take "even one rupee/dollar from [Satyam] ... on account of the inflated results. However, analysts quickly dubbed the fraud he created "India's Enron" and suggested the fallout out would take months to settle.

Bhavtosh Vajpayee of CLSA, the brokerage, said: "The independence of the board was already in question, now the auditors' (PwC) complicity in what seems to be a multi-year mis-statement of financials will also be explored."