India's Satyam Computer Chief Resigns On $1.4 Billion Accounting Fraud, Stock Plunge Over 70%

January 7, 2009 4:51 a.m. EST

Mumbai, India (AHN) - India's Satyam Computer Services Ltd. (NYSE: SAY) plunged on Mumbai's stock exchange after the founder and chairman of the country's fourth-largest software company was found to have committed a fraud by manipulating accounts over the period of last five quarters.

The company, which is also listed on the New York Stock Exchange under ADR category, had inflated its profit, forcing 53-year-old Chairman B. Ramalinga Raju to step down from his post on Wednesday.

In a letter issued on Wednesday to the Securities and Exchange Board of India (SEBI), India's market regulator, Raju has accepted that he falsified accounts and assets of 50.4 billion rupees ($1.04 billion), by understating a liability of 12.3 billion rupees, and overstated debtors' position of 4.9 billion rupees.

"The gap in the balance sheet has arisen purely on account of inflated profits over a period of last several years (limited only to Satyam standalone, books of subsidiaries reflecting true performance)," Raju wrote in the letter.

He added, "What started as a marginal gap between actual opera ting profit and the one reflected in the books of accounts continued to grow over the years."

The Securities and Exchange Board of India said Wednesday that it has forwarded the letter from Satyam to Ministry of Company Affairs (MCA) and is discussing the legal actions that could be taken against the company and the auditors.

"This event is a first of its kind in India and we need to learn a lot from this," Sebi Chairman C B Bhave was quoted as saying by the Economic Times, a local newspaper.

"We are already in touch with the stock exchanges and the ministry (MCA)," Mr Bhave added. "We also need to check whether the audit was done properly," he added.

PricewaterhouseCoopers, which is the biggest of the Big Four accounting firms, was the statutory auditor for Satyam Computer, the newspaper said.

As the scam was unraveled on Wednesday, shares of Satyam plunged deep into red by more than 70 percent, pushing down India's Sensex or Sensitive Index as much as 5.9 percent to 9,729.56 points in afternoon trading.

Raju said in his letter that out of the reported cash and bank balances of 53.61 billion rupees on Sept. 30, 50.4 billion rupees was non-existent.

"As the promoters held a small percentage of equity, the concern was that poor performance would result in take-over, thereby exposing the gap," Raju said.

He added, "It was like riding a tiger, not knowing how to get off without being eaten."