Satyam scandal shakes stock market
BANGALORE, India – The head of Indian outsourcing firm Satyam Computer Services resigned on Wednesday, disclosing that profits had been falsely inflated for years.
Satyam’s shares plunged almost 80 percent. India’s biggest corporate scandal in memory threatened future foreign investment flows into Asia’s third-largest economy and cast a cloud over growth in its once-booming outsourcing sector.
Bombay’s main benchmark index tumbled 7.3 percent and the Indian rupee fell.
Ramalinga Raju, founder and chairman of India’s fourth-largest software services exporter, said in a statement that Satyam’s profits had been massively inflated over recent years but no other board member was aware of the financial irregularities.
“If a company’s chairman himself says they built fictitious assets, who do you believe here? This has put a question mark on the entire corporate governance system in India,” said R.K. Gupta, managing director at Taurus Asset Management in New Delhi.
Raju, who founded Satyam more than two decades ago and who took it public in 1991, said about $1 billion, or 94 percent of the cash on the company’s books, was fictitious.
The 54-year-old Satyam chairman came under close scrutiny last month after the company’s botched attempt to buy two construction firms partly owned by its founders. Raju said on Wednesday that was a final attempt to resolve the problem of the fictitious assets.
“It was like riding a tiger, not knowing how to get off without being eaten,” Raju said in his letter, adding he was prepared to face up to the legal consequences.
Satyam said its managing director and co-founder B. Rama Raju, Raju’s brother, had also resigned. It did not give any reason for the resignation.
The company’s difficulties multiplied when the World Bank, a major customer, barred Satyam from new business, citing “improper benefits” given to World Bank officials.
“In a bull market people forgot about it (corporate governance),” said Singapore-based Ashish Goyal, chief investment officer at Prudential Asset Management. “In a bear market chickens are coming home to roost, so it gets highlighted at a time like this.”
Just three months ago, Satyam received an award from a group of Indian directors for excellence in corporate governance.
By close of trade, Satyam’s share value slumped to about $550 million from around $7 billion as recently as last June.
New York-listed Satyam specializes in business software and back-office services for clients such as General Electric and Nestle.
“I think there is no future for this stock. This case for India is similar to what happened to Enron in the U.S.,” said Jigar Shah, senior vice-president at Kim Eng Securities.
“It will not stop at Satyam. Many more companies will come into scrutiny like that. There is a strong possibility investments in India will be affected.”
The scandal set off a wave of condemnation from Indian market regulators and government officials, and prompted banker Merrill Lynch to terminate its engagement with Satyam.
“It’s going to impact the Indian outsourcing industry. Customers are going to be concerned about offshoring firms in India,” said Sudin Apte, country head of Forrester in the western city of Pune.
Satyam said it would go ahead with a planned board meeting on Saturday to consider a share buyback following a rash of broker downgrades even after its acquisitions were called off last month.
Source
http://www.msnbc.msn.com/id/28539007/