India vows to prevent fraud after Satyam corporate shock

Chairman resigned after revealing India's biggest corporate scandal in memory.

India vows to prevent fraud after Satyam corporate shock

India vowed to strengthen laws to prevent corporate fraud after Satyam Computer, the country's fourth-largest software company, shocked investors by revealing profits had been falsely inflated for years.

Chairman Ramalinga Raju resigned on Wednesday after revealing India's biggest corporate scandal in memory, sending the company's shares plunging nearly 80 percent.

Investigators are expected to swoop on the company's headquarters in Hyderabad in southern India on Thursday to search for clues on how the fraud could have been hidden for so long.

"The government will take all necessary action to ensure these types of scandals do not take place again. Whatever steps could be taken will be taken," Corporate Affairs Minister Prem Chand Gupta told Reuters late on Wednesday.

The scandal has cast a cloud over foreign investment in Asia's third-largest economy and over its once-booming outsourcing sector, which posted stunning sales growth for years and lavished investors with handsome returns.

It may also increase investor nervousness about weak corporate governance and oversight in emerging markets, which are still reeling from the global financial crisis.

"SATYAM A BIG LIE", the Economic Times said in a huge headline on its front page, adding "The shame and scandal has stunned India Inc."

Satyam employees shuffled into its Hyderabad office as usual on Thursday, refusing to speak to reporters outside the gates.

In a bid to shore up investor confidence, a company statement said that other senior executives, including interim chief executive Ram Mynampati, had committed to stay with the firm.

The new company chief was expected to hold a news conference at 5 pm (1130 GMT) on Thursday.

The government has asked the registrar of companies in Hyderabad to file a report, while the stock market regulator has ordered a probe into trading in the company's shares.

Stocks in India did not trade on Thursday due to a public holiday. Bombay's benchmark stock index tumbled more than 7 percent on Wednesday and the Indian rupee fell after the Satyam bombshell, which some analysts dubbed "India's Enron" after the collapsed U.S. energy firm.

The New York Stock Exchange halted trading in Satyam's shares indefinitely, saying it wanted to review the news.

Some investors in Satyam's American Depositary Receipts have already filed class action suits against the firm, lawyers said.

Worried costumers

Since opening its economy to the world in the early 1990s, India has seen a proliferation of new companies. Strong economic growth has attracted foreign investors, and analysts say existing laws are inadequate to deal with the surge in corporate activity.

"The type of incident that happened in Satyam does not mean our entire corporate sector is like that. We need to see this type of incident does not happen again," Gupta said.

In a resignation letter that stunned India's business world, Raju said about $1 billion, or 94 percent of the cash and bank balances on the company's books at end-September did not exist.

Raju, who founded the company in 1987, said no other board member was aware of the irregularities at Satyam, which in Sanskrit means "truth."

Customers have flooded the company with calls since news of the scandal broke, a senior Satyam official said on Thursday.

"Of course they are concerned. I am getting so many calls," the senior official, who spoke on condition of anonymity, told Reuters. "We are...telling them it is business as usual." Satyam could go out of business if big clients pull out and there is little chance of it being bought by another company given the scandal and losses from potential law suits, ABN Amro said in a research note, adding the firm's cash position was "precarious".

Satyam specialises in business software and back-office services for clients such as General Electric and Nestle.

Speculation that the troubled company may be looking for a buyer grew last month after it asked Merrill Lynch's Indian business to examine its strategic options. Merrill said on Wednesday it had terminated that advisory deal, adding it had found material accounting irregularities.

Raju, 54, came under close scrutiny last month after the company's botched attempt to buy two construction companies partly owned by its founders, which Raju said on Wednesday was a final attempt to resolve the problem of the fictitious assets.

"It was like riding a tiger, not knowing how to get off without being eaten," Raju said in his letter.

Reuters
Last Mod: 08 Ocak 2009, 11:27
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