The chairman of India's Satyam Computer Services quit Wednesday after admitting the company's profits had been doctored for several years, shaking faith in the country's corporate giants as shares of the software services provider plunged nearly 80 percent.
The company's balance sheet—riddled with "fictitious" assets and "non existent" cash—contained a $1 billion hole that could no longer be concealed after a deal intended to save the struggling company was scuppered, Chairman B. Ramalinga Raju said in a letter to the board.
"Every attempt made to eliminate the gap failed," said Raju, 53. "It was like riding a tiger, not knowing how to get off without being eaten."
B. Rama Raju, managing director of Satyam Computer and the chairman's brother, also quit.
News of the fraud dragged down the benchmark Sensex stock index 7.3 percent to 9,586.88 with Satyam's shares plummeting nearly 78 percent to 40 rupees. The accounting scandal raises questions about the quality of corporate governance in India and is likely to reverberate around the region.
Satyam, which means "truth" in India's ancient Sanskrit language, had "inflated profits over a period of (the) last several years," Raju said in his letter, which was released to the Bombay Stock Exchange.
For the July-September quarter alone, operating profit of $133.4 million had been overstated by almost 11 times the actual result.
Rajeev Sampat, an independent analyst, said the amount and nature of the fraud had shocked investors.
"It is one of the biggest frauds the Indian capital market has seen. People have been taken by surprise by the gravity of the event," he said. "After overstating profit and understating debt, the company's net worth is zero."
Satyam said in a statement that it was "shocked by the contents of the letter" but the company would rally to find a way forward.
Raju said that none of the other board members had any knowledge of the company's real financial situation and apologized to all stakeholders in his letter, claiming that he had not benefitted from the doctored results.
(India's Satyam Computer Services admitted to inflating its profit results. Watch the accompanying video for more...)
"Neither me, nor the managing director took even one rupee/dollar from the company and have not benefited in financial terms on account of the inflated results," he said.
The son of a grape farmer in India's southern Andhra Pradesh state, Raju founded Satyam in 1987 and over the last two decades the company became India's fourth largest software services company. A key player in the Indian outsourcing industry, the company is listed on the New York Stock Exchange.
After getting a business degree from Ohio University, Raju first started a weaving mill and then ventured into real estate before diversifying into the software services industry.
The financial troubles at Hyderabad-based Satyam started becoming public last month when outraged investors forced the company to call off a $1.6 billion acquisition of two construction firms both partly owned by Satyam's founders, including Raju and his family.
Compounding Satyam's problems, the World Bank last month barred the company from receiving direct contracts from the bank for eight years for what the lender said were inappropriate business practices.
The Securities and Exchange Board of India, the market regulator, said it was investigating.
"We have to go beyond this letter and find out what actually has happened," SEBI chief C.B. Bhave told reporters. "This is an issue which has very serious implications. It involves the Companies Act and the violation of the listing agreement with SEBI. It also raises the issue of authenticity of accounts that have been audited and certified by the auditors."