The info tech outsourcer shocks investors with a letter outlining balance-sheet misdeeds. Rival firms may benefit put on the supposition that customers still trust them

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B. Ramalinga Raju resigned put on Jan. 7, 2009, admitting the firm had falsified accounts and assets and inflated its profits covering several years. Noah Seelam/AFP/Getty Images

By Manjeet Kripalani

On the morning of Jan. 7, Ramalingam Raju, the chairman of troubled Indian IT outsourcing company Satyam Computer Services (SAY), sent a startling letter to his board and the Securities & Exchange Board of India. Raju acknowledged his blamableness in hiding news that he had inflated the footing of cash on the balance sheet of India’sitting fourth-largest IT company by stingily $1 billion, incurred a liability of $253 million on funds arranged by the agency of him personally, and overstated Satyam’sitting September 2008 quarterly revenues by 76% and profits by 97%. After submitting his resignation, Raju ended his letter by apologizing for his inability to close what began as a "marginal gap between operating profits and the one reflected in the books of accounts" but grew unmanageable. "I am now prepared to subject myself to the laws of the disembark and effrontery the consequences thereof," he wrote.

The letter shocked and angered incorporated India, that has looked to IT executives because role models for a new strain of Indian entrepreneur. The benchmark Sensex stock index dropped 7.3% and Satyam shares fell closely 78% on the day in the manner that investors fled in droves. Goldman Sachs (GS) suspended its recommendations on Satyam "because in that place is not currently a sufficient basis for determining every investment rating or price mark for this company," Goldman analysts Julio Quinteros Jr. and Vincent Lin told investors. Earnings through share, warned JPMorgan (JPM) analysts in a report, "may be 70%-80% lower than reported numbers and consensus estimates despite ‘09-’10." Satyam had become "India’s Enron," said CLSA India analyst Bhavtosh Vajpayee, calling the contingency "somewhat accounting wile beyond imagination [and] an embarrassing and shocking episode in Indian corporate governance."

As executives at other Indian outsourcing companies nervously determine what impact the scandal will have on them, many industry observers now argue that the Satyam case will damage India’session reputation as a reliable provider of IT services. Because of the Satyam scandal, they say, Indian rivals will come under greater scrutiny by regulators, investors, and customers. "The bleb is going to burst in terms of trust," says a national obligations overseer in Hong Kong who has followed Satyam closely. Doubts in an opposite direction the reliability of Indian outsourcers are especially important, since customers ofttimes allow the Indian companies access to easily affected systems. "This industry doesn’t just make widgets," the manager explains. "It’sitting an intimate relationship." Certainly, says Gartner (IT) analyst Diptarup Chakraborti, "there will have existence caution in the short term, infidelity, and questioning." After all, "no one wants to perform business with a known fraudster."

Investors Want Answers

Industry executives are desperately afflictive to contain the fallout. "The diminish in governance and institutions represents a serious object to to India," says Rajeev Chandrashekhar, president of the Federation of Indian Chambers of Commerce and Industry. Wipro Technologies (WIT) Chief Financial Officer Suresh Senapaty, went on TV to say that Satyam’session actions should not infect the entire Indian IT industry. And Mohandas Pai, head of human resources at Infosys (INFY) and the company’s forgoing chief financial officer, argued Satyam’s behavior is atypical. "We wish the regulators will investigate and punish the guilty," he says. "But this is not representative of our industry." John McCarthy, vice-president of Forrester Research, allays some fears. "I look at Satyam as one isolated case, and put on’t think the developments would have any stroke upon India’sitting No. 1 position as an offshore location."

Still, investors and clients are going to scarceness answers. For instance, they’re demanding to know how Satyam’s hearer, PricewaterhouseCoopers, endorsed the assemblage’s accounts. "Auditors’ complicity in what seems to have existence a multiyear misstatement of financials will in like manner be explored," said CLSA’s Vajpayee in his Jan. 7 report. Already, India’s Registrar of Companies had begun a probe into a failed acquisition last month by Satyam of companies run by Raju’s two sons. Now the people’s securities regulator will tack on its weight by investigating the PwC audit. PwC issued a recital saying it was examining the issue.

Raju’s confession is the latest in a obdurate ride for Satyam, its shareholders, and its stakeholders over the past year. The company’s clients include multinationals such as Nestlé, General Motors (GM), and General Electric (GE). But in September, the World Bank banned Satyam from doing any of its work after it place Satyam employees had hacked into its system and gained access to sensitive information. It also did not renew their five-year contract. Satyam denied any wrongdoing. Then came a fresh blow on Dec. 16, when Raju announced the company would spend $1.6 billion to buy two infrastructure companies run by this sons, only to reverse the decision a few hours later under shareholder pressure. Satyam ADRs lost 50% of their value yesterday night. December also brought news of pending litigation by a former client, online mobile-payments service Upaid Systems, which filed a case of intellectual fraud and forgery against Satyam in 2007; a Texas court is scheduled to guidance a hearing on the case Jan. 7.

Tip of the Iceberg

In India, the Raju family’s non-IT activities had already been viewed by some suspicion, in particular a free emergency ambulance service Raju began in Hyderabad, where Satyam is based. Last year, public-interest activists filed a petition challenging the lack of transparency and arbitrariness in the award of ambulance-services contracts in 12 Indian states—total of that had been awarded to Raju’session operation. In November the Supreme Court of India questioned the contracts and demanded an explanation, what one. could determination in the contracts inmost nature canceled.

With Satyam’s management focused elsewhere, business suffered. Clients complained concerning lack of civility, and many professional managers began to leave.

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