(By Salman - iStockAnalyst Writer)Investors got a rude shock on Wednesday after Ramalinga Raju, founder and chairman of Satyam (NYSE: SAY), India's fourth-largest outsourcer, resigned saying that the firm's profit had been inflated over the years.
The shares of the company plunged Rs 138.70 or 77.51% to Rs 30.80 at India's National Stock Exchange after the revelation on Wednesday.
“The gap in the balance sheet has arisen purely on account of inflated profits over a period of last several years ... 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. Every attempt made to eliminate the gap failed. It was like riding a tiger, not knowing how to get off without being eaten," Ramalinga Raju said in a statement.
In a letter to the board of directors, Raju admitted that the company's balance sheet was inflated to Rs 5,361 crore ($1.1 billion) at the end of September 2008 against the actual Rs 5,040 crore ($1.04 billion). There was also an accrued interest receipt of Rs 376 crore ($0.07 billion), which was non-existent. The balance sheet also had an understated liability of Rs 1,230 crore ($0.25 billion) on account of funds arranged by Raju, to keep Satyam's operations running. The debtors position was also overstated by Rs 490 (0.10 billion) crore to Rs 2,651 crore (0.55 billion).
Raju, in a letter to Bombay Stock Exchange said: "I sincerely apologise to all Satyamites and stakeholders, who have made Satyam a special organization, for the current situation." He said further "I am now prepared to subject myself to the laws of the land and face consequences thereof."
The management of the company had come under fire in December after the promoters unsuccessfully tried to buy two struggling real estate firms-Maytas Properties and Maytas Infra from Ramalingu Raju's son.
Additionally, the company attracted a lot of bad press after World Bank, a major client, banned Satyam from new business, alleging that the company had offered "improper benefits" to Bank officials. Satyam has demanded those comments be retracted.
The Hyderabad, India based company employs 53,000 people globally and counts Citigroup Inc. (NYSE: C), General Electric (NYSE: GE), General Motors (NYSE: GM), Nissan Motor Co. (NASDAQ: NSANY) and Qantas Airways Ltd as its clients. Shares of the company are listed on New York Stock Exchange Euronext as well. The company is audited by PricewaterhouseCoopers.
Indian equity markets finished deep in red on Wednesday. The S&P CNX Nifty Index on the National Stock Exchange tumbled 192.40 points or 6.18% to finish at 2920. The Bombay Stock Exchange benchmark Sensex plummeted 749.05 or 7.25% to end at 9587.
Disclosure: Author does not own any of the stocks discussed here.
