satyam story part 2

Ramalinga Raju built Satyam Computer Services Ltd. into India’s fourth-biggest software maker over the past two decades. Yesterday, he undermined the company’s future with revelations that he had overstated profit and falsified assets for “several years.”
Satyam fell 78 percent after Raju told the Hyderabad-based company’s board he had inflated the balance sheet by 50.4 billion rupees ($1.03 billion) with “fictitious” cash, according to a letter delivered to the Bombay Stock Exchange.
“There is a clear danger of customers deserting Satyam if rapid steps aren’t taken,” said Apurva Shah, head of research at Mumbai-based brokerage Prabhudas Lilladher Pvt. “That may put the viability of the company in question.”
The scandal shook confidence in India’s stock market, sending the Sensex index down 7.3 percent yesterday, its biggest drop in more than 10 weeks. Securities & Exchange Board of India Chairman C.B. Bhave said the disclosure was of “horrifying magnitude,” and the markets regulator ordered a probe into trading of Satyam shares.
India’s main accountants group has started an investigation into Satyam, Ved Jain, president of the Institute of Chartered Accountants of India, said in a telephone interview from New Delhi. “We will come out with the truth very quickly,” he said.
The government is verifying the facts about Satyam and will take action after the investigation is complete, Prem Chand Gupta, minister for company affairs said yesterday in New Delhi.
“There will be no leniency in dealing with this case,” he said.
‘Woeful Misuse’
The fall of the 54-year-old entrepreneur, a pioneer of India’s software industry, began three weeks ago when Satyam proposed paying $1.6 billion for two companies connected to Raju. The plan was scrapped 12 hours later, after investors called it a “woeful misuse of cash.” Yesterday, Raju said the sale was designed to plug the hole in Satyam’s balance sheet.
As recently as September, the London-based World Council for Corporate Governance gave Satyam its Golden Peacock Award. The council yesterday withdrew the prize because Satyam, which means truth in Sanskrit, had withheld material facts. Raju received CNBC’s Corporate Citizen of the Year award in Asia in 2002 and was named Ernst & Young Entrepreneur of the Year in 2007, according to Satyam’s Web site.
Raju resigned yesterday along with his younger brother, Rama Raju, the company’s managing director.
Mea Culpa
“His mea culpa is unbelievable,” Shankar Sharma, director and chief global trading strategist at First Global Stockbroking Pvt. in Mumbai. “The fact that he admitted it in a letter is a shocking and a first, at least in India.”
Raju is a graduate of Ohio University in Athens, Ohio, according to Satyam’s Web site.
He founded Satyam in 1987 following rivals such as Tata Consultancy Services, India’s biggest computer services company, which was established in 1968, and Infosys Technologies Ltd., the second-biggest, which started operations in 1981.
Indian computer firms grew as companies in the U.S. and Europe started farming out software coding to cut costs.
In May 2001, Satyam became only the third Indian company to trade in the New York Stock Exchange. It raised $140.8 million. The company counts ArcelorMittal, the world’s largest steelmaker, and Nissan Motor Co., Japan’s third-biggest carmaker, among its customers.
Telstra Corp., Australia’s largest telephone company, said Satyam’s disclosure will be a factor when it cuts two out of its four main technology suppliers this year. Qantas Airways Ltd., Australia’s biggest airline, said it has a backup plan “in the event Satyam is unable to continue services.”
Satyam employs about 53,000 people and has offices from the U.S. to the U.K., Brazil and Australia.
‘No Stone Unturned’
“I would like to emphasize that Satyam is leaving no stone unturned in our efforts to create a sound foundation for our future,” Raju said Oct. 17 after reporting second-quarter net income of 5.81 billion rupees, beating the median estimate of 5.47 billion rupees from eight analysts surveyed .
In his letter to the Satyam board, Raju said he had improperly added 5.88 billion rupees to second-quarter accounts.
PricewaterhouseCoopers LLC’s Indian unit, Satyam’s auditor, is examining Raju’s statement, the firm said in an e-mailed statement, declining to comment further because of client confidentiality.
“This quarter will be tumultuous for us,” interim Chief Executive Officer Ram Mynampati said yesterday 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.”
Puffed Up
Raju said he puffed up profit figures to bolster Satyam’s stock price because he feared a decline would make the company a takeover target because of the founder’s small stake.
SRSR Holdings Pvt., which holds the Raju family’s shares in Satyam, reduced its holding to 3.6 percent from 8.3 percent last month, Satyam told the Bombay Stock Exchange in two filings made during the past week. Of the 3.6 percent, 1.7 percent is pledged to lenders, it said.
Satyam’s shares fell 62 percent last year on the Bombay Stock Exchange, compared with a 54 percent decline in the exchange’s 30-member Sensitive Index.
Concerns about Satyam had begun to leak out even before Raju’s statement.
Last month, the World Bank declared Satyam ineligible for contracts for eight years from September, alleging “improper” benefits were given to the bank’s employees. Two days later, Satyam demanded an apology, saying the bank’s statements had harmed the company.
“One can fool some people for some time, but not all the people for so long,” said Arun Kejriwal, founder of Kejriwal Research & Investment Services in Mumbai.