Chair of Indian outsourcer admits faking financial results

BANGALORE – The chairman of troubled Indian outsourcer Satyam Computer Services on Wednesday tendered his resignation to the company’s board of directors, admitting that the company inflated its financial results.

In a resignation letter submitted to Satyam’s board, B. Ramalinga Raju said the company’s balance sheet carries inflated bank and cash balances, non-existent accrued interest, understated liabilities, and overstated credit amounts owed to the company. Satyam’s managing director, B. Rama Raju, Raju’s brother, also resigned on Wednesday.

The irregularities in the balance sheet arose because the company inflated profits for the last several years, Raju said.

Satyam is listed in India and the U.S.

For the quarter ended September 30, Satyam reported revenue of 27 billion Indian rupees (US$570 million) and an operating profit of 6.5 billion rupees, compared to actual revenue of 21.12 billion rupees and an operating profit of rupees 610 million rupees, Raju said.

While stating that he and his brother did not benefit in financial terms from the inflated results, Raju said he is now prepared to subject himself to any legal penalty and face the consequences of his actions.

Satyam’s troubles came to the surface after the company announced on Dec 16 plans to diversify into the construction business by acquiring two companies in which Raju and his family had large interests. Satyam reversed the decision within a day, after investors and analysts opposed the move.

The acquisition aimed to replace “fictitious assets with real ones”, Raju said in his resignation letter. The company’s woes worsened when the World Bank, a Satyam customer, said in a statement on Dec 23 that it had declared Indian outsourcer Satyam ineligible to receive direct contracts from the bank under its corporate procurement program for a period of eight years.

Satyam has been declared ineligible for contracts for providing improper benefits to Bank staff and for failing to maintain documentation to support fees charged for its subcontractors, according to a bank statement. Satyam subsequently described the statement by the World Bank as inappropriate, and demanded an apology from the bank. The World Bank stood its ground.

After investor opposition to the bid to acquire construction companies, Satyam said on Dec 29 that it had appointed consultants DSP Merrill Lynch to consider strategic options for the company. The investment bank on Wednesday terminated its agreement with Satyam.

Satyam’s Board is scheduled to meet on Saturday. The meeting, originally called to discuss a share buyback plan, was originally scheduled to be held on Dec. 18 and was postponed.

The Satyam stake held by Raju and family, the founders of the company, has fallen to 3.6 percent from 5.1 percent after institutional lenders sold stock pledged to them this week. The reduced holding by the founders makes the company ripe for a takeover, according to analysts.

Analysts and investors also say that the best way out for Satyam is for one of its competitors to acquire the company. Some of the names of potential buyers making the rounds are IBM, Hewlett-Packard, and Indian outsourcer HCL Technologies.

“It’s looking more and more likely that after the special board of directors meeting on January 10, 2009, there will be management and governance changes and even potentially the outright sale of the company,” Forrester Research said last week.

Sourcing and vendor management executives will need to review their dependence on Satyam and ensure that they have strong contingency plans and change of ownership clauses in the event that Satyam is acquired, it added.

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