• ASIA TECHNOLOGY
• JANUARY 8, 2009

Corporate Scandal Shakes India

Chairman of Outsourcing Giant Resigns, Saying He Concocted Financial Results

By NIRAJ SHETH, JACKIE RANGE and GEETA ANAND

The chairman of one of India's largest technology companies said he concocted key financial results, including a fictitious cash balance of more than $1 billion, sending shock waves across India and likely prompting investors to question other corporate results as the once-hot economy slows.

B. Ramalinga Raju, founder and chairman of Satyam Computer Services Ltd., said in a letter of resignation that he also overstated profits for the past several years, overstated the amount of debt owed to the company and understated its liabilities. Eventually, he said, the scheme reached "simply unmanageable proportions" and he was left in a position that was "like riding a tiger, not knowing how to get off without being eaten."

The news prompted concerns about corporate governance and accounting standards across Indian industry. Satyam -- the name means "truth" in Sanskrit -- was audited by PricewaterhouseCoopers and has had high-profile independent directors, including a Harvard Business School professor, on its board. With 49 worldwide offices including eight in the U.S., Satyam also was one of India's flagship technology companies that have come to define a new, modern Indian industry that competes on the world stage. PricewaterhouseCoopers said it was examining Mr. Raju's statement and declined to comment further.

Immediate comparisons were drawn to the watershed in U.S. corporate accounting and governance standards that stemmed from the Enron crisis several years ago. In a statement, the Confederation of Indian Industry, an influential trade group, said: "There is a need to immediately examine the loopholes in regulation, accounting, audit and governance that allowed such lapses to occur and address them with urgency."

Shares on the Bombay Stock Exchange's benchmark Sensex index fell 7.2% to close at 9586.88. Satyam's shares fell 78% to 39.96 rupees in Bombay. In New York, the company's American depositary receipts didn't trade Wednesday.

C.B. Bhave, chairman of the Securities and Exchange Board of India, the principal markets regulator, said in a TV interview that the sham appeared to be of a "horrifying magnitude." The government is expected to refer the case to the agency that investigates serious fraud. Mr. Raju, 54 years old, was unavailable for comment, according to a Satyam spokesman.

Tough Times

Satyam's decline comes at a tough time for India's technology companies, which have come to symbolize the nation's own aspirations as a commercial superpower and a major force in global outsourcing and data management. The industry, while only directly employing about two million of India's 1.1 billion population, helped build a thriving services sector in buzzing metropolises such as Bangalore, Mumbai, Delhi and Hyderabad.

But the industry has been hard hit as its clients succumb to the global economic slowdown. Wall Street is a major customer. In the year ending March 31, 2008, Satyam also reaped a reported $400 million of its reported $2.1 billion in sales from automotive companies, including struggling General Motors Corp. andFord Motor Co., though the company's sales figures are now in question.

More broadly, bankers and analysts said, the economic slowdown in India may prompt further unwelcome revelations from Indian companies. Some have grown from small, family-operated enterprises to major international corporations in just a few years. After years in which operating multiple sets of books was a common practice to avoid taxation, some companies may not have developed the corporate governance standards that international investors expect. "There are good chances that such cases will grow, where there are certain accounting irregularities and the truth has been suppressed," said Jigar Shah, head of research for Mumbai-based Kim Eng Securities India Ltd.

That could make it difficult for India to attract back the huge sums of institutional investor money that have fled the country as the economy slowed.Aberdeen Asset Management PLC, the U.K.-based investment firm that was Satyam's largest shareholder, sold its entire 5.2% stake Wednesday. An Aberdeen spokesman declined to comment.

Son of a Farmer

Mr. Raju, the son of a farmer, attained a master's in business administration from Ohio University in the late 1970s and returned to India determined that it become competitive in global business, according to a person who knows him. He founded Satyam in 1987 and was among the first to recognize the potential for Indian technology firms to grow by addressing potential software bugs that threatened computers with the change in the millennium.

The company grew into India's fourth-largest technology firm by sales, employing 53,000 people at its headquarters in the southern Indian city of Hyderabad. Mr. Raju also sponsored a string of nonprofit foundations that aim to improve the lot of rural Indians.

Satyam counts among its clients global giants such as Nestlé SA, General ElectricCo., Caterpillar Inc., Sony Corp. and Nissan Motor Corp. Yet Mr. Raju has been known to grumble that Satyam never attained the high profile of larger tech firms such as Wipro Ltd. and Infosys Technologies Ltd.

A spokesman for Nissan said it has no current plans to sever its relationship with Satyam but "will keep a close watch on the situation in the future." A Nestlé spokeswoman said Satyam had guaranteed the continuation of normal services and no disruptions were expected. Sony and Caterpillar declined to comment. GE didn't respond.

The accounting scandal set off speculation about how rivals will be affected. "I think there could be a flight to quality, which means some of the larger companies, such as Infosys, could benefit," said Gilford Securities analyst Ashish Thadhani. Non-Indian companies, such as Accenture Ltd. and International Business Machines Corp. also could gain market share, he said.

In his five-page confessional letter to Satyam's board, Mr. Raju didn't explain why a gap developed between the company's operating profit and the one reflected in the books. He said the gap initially it had been marginal, but as Satyam grew in size and its costs increased, so did the size of the gap.

Mr. Raju fretted that if the company was seen to perform poorly, it could prompt a takeover attempt that would expose the gap, so he concocted ways to plug it. Among them: pledging as collateral the shares he and other company backers owned to raise a total of $250 million in funds for Satyam in the past two years. He said the loans, which weren't reported on Satyam's balance sheet, were based on "all kinds of assurances" and were designed to allow Satyam's operations to continue.

"Every attempt was made to keep the wheel moving and to ensure prompt payment of salaries to associates," the letter said. But it added, "Every attempt to eliminate the gap failed."

In the letter, Mr. Raju said he "has not benefited in financial terms on account of the inflated results."

Publicly, the company reported stellar numbers: $2.1 billion in sales and $427.55 million in profit in the year ending March 31, 2008. That represented a growth of 48% in revenue and 35.5% in profit from the year before.

But the ruse became increasingly difficult to maintain as the company's fortunes dwindled. Mr. Raju said in his letter that in the quarter ending Sept. 30, Satyam's real sales were $434 million, even though the company reported $555 million. Satyam reported $136 million in profit, even though the real amount was only $12.5 million. The company also reported it had $1.1 billion in available cash. In reality, it only had $66 million, Mr. Raju said.

The endgame began in mid-December when Satyam agreed to pay $1.6 billion to acquire Maytas Properties Ltd. and Maytas Infra Ltd., two construction companies run by Mr. Raju's two sons and in which Mr. Raju and his brother held stakes. (Maytas is Satyam spelled backward.)

Investors hammered Satyam's share price and criticized the company and its board for trying to expand into unrelated industries in companies tied to the Raju family. Among the directors who approved the deal were Krishna Palepu, professor at Harvard Business School, and Mendu Rammohan Rao, dean of the prestigious Indian School of Business in Hyderabad.

Impact on Deal

After Satyam's shares plunged, the board decided not to pursue the deal and the two directors, along with two other independent directors on the nine-member board, resigned late last month. Mr. Palepu couldn't be reached for comment; an assistant in his Harvard office said he was unavailable. Mr. Rao couldn't be reached for comment.

Mr. Raju said in his letter that the Maytas companies' acquisition was "the last attempt to fill the fictitious assets with real ones."

Shortly before Christmas, adding to the company's woes, the World Bank announced it had blacklisted Satyam for "improper benefits to bank staff" and "lack of documentation on invoices" for World Bank work. The bank banned Satyam from bidding for contracts for eight years. Satyam called for the World Bank to withdraw its statement, but to no avail. Satyam's stock kept sinking as credibility concerns mounted.

The World Bank had been looking into alleged bribery by Satyam since at least 2006 and had initially barred the company in February 2008, although it didn't disclose the action until it issued a press release on the matter on Dec. 23. The World Bank didn't have any initial comment on its role.

The final blow came in the last few days. Those who had loaned money to Mr. Raju to keep the company running began to sell the pledged shares to meet margin calls, the forced selling of shares to cover losses.

The Raju family's stake in the company, which stood at 8.6% at the end of September, fell to just 3.6% as of Tuesday. Mr. Raju's letter doesn't spell out why exactly that ended his efforts to maintain the facade but it may have deprived him of the funds needed to keep the company going. "The last straw was the selling of most of the pledged share[s] by the lenders on account of margin triggers," he said in the letter.

In the letter he said that no past or present directors knew of his scheme but left open the possibility that his brother, Satyam managing director Rama Raju, knew about the fraudulent reporting. The letter referred in several places to the chairman and his brother together, asserting that neither of them sold shares in recent years except for philanthropic purposes, neither one "took even one rupee from the company," and that neither of their spouses or family members "has any idea about these issues." Rama Raju also resigned Wednesday; he was unavailable for comment, a Satyam spokesman said.

Whether Satyam can withstand the scandal is now in doubt. Ram Mynampati, a Satyam director tasked with running the company during the crisis, said in a statement: "We have gathered together at Hyderabad to strategize the way forward in light of this startling revelation."

—Romit Guha, Shara Tibken and Bob Davis contributed to this article.

Write to Niraj Sheth at niraj.sheth@wsj.com, Jackie Range atjackie.range@wsj.com and Geeta Anand at geeta.anand@wsj.com