A four-day relief rally on India's stock market ended abruptly on Wednesday after the chairman of Satyam Computer Services Ltd resigned with a confession of accounting fraud in India's biggest corporate governance scandal.
Satyam's shares collapsed 78%, leading the bellwether Sensex index on the Bombay Stock Exchange (BSE) down 7.3%.
B Ramalinga Raju, chairman of Satyam, India's fourth largest outsourcing company, admitted "non-existent" cash and interest was logged on the company's balance sheet in September 2008. In a letter to Satyam's board of directors, Raju said he was stepping down and was "prepared to submit himself to the law of the land". Raju said that in September, Satyam reported second quarter revenues of 27bn rupees (£374m) against actual revenues of 21bn rupees, and an operating margin of 24% against an actual margin of 3%. Satyam employs 53,000 staff in 66 countries, and counts 185 Fortune 500 companies among its customers. In the letter, Raju said: "The gap in the balance sheet has arisen purely on account of inflated profits over a period of the last several years (limited only to Satyam standalone, books of subsidiaries reflecting true performance). "What started as a marginal gap between actual operating profit and the one reflected in the books of accounts continued to grow over the years", he added. "It has attained unmanageable proportions as the size of company operations grew significantly." He described the experience of trying to close the gap between the fictionalized revenue and actual turnover as "like riding a tiger, not knowing how to get off without being eaten". The revelation follows Satyam's failed attempt last month to buy two construction firms partly owned by the company's founders. The letter has also been circulated to the chairman of the Securities and Exchange Board of India and the stock exchanges, and Satyam has expressed dismay at the contents of the letter. Interim chief executive Ram Mynampati said the senior leaders of the company had gathered in Hyderabad, and said in a statement: "We are obviously shocked by the contents of the letter. We have gathered together at Hyderabad to strategize the way forward in light of this startling revelation." Satyam said it is "committed to uphold the highest levels of corporate transparency" and "will co-operate with the relevant regulatory authorities to conduct detailed investigations into this matter". "Considering the size of India's equity market and that Satyam is part of Sensex 30, the scandal is bigger than (US energy) Enron for the domestic markets," said a Mumbai-based hedge fund manger, who didn't want to be named because he is not authorized to speak to the media. The scandal has the potential to "severely dampen" sentiment of foreign investors towards India, said Amar Ambani, vice-president, research, at brokerage India Infoline Ltd. Satyam revelation comes as a big blow to confidence in Indian capitalism. Leading family conglomerates have already had a tough yearâ€"poor performance and acquisition choices have seen confidence falter in both the Tata and Reliance business empires. The Satyam fraud will further erode faith in the whole Indian model of capitalism, which is largely dominated by family-run conglomerates.