The info tech outsourcer shocks investors with a letter outlining balance-sheet misdeeds. Rival firms may benefit if customers still trust them

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

By Manjeet Kripalani

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On the daybreak of Jan. 7, Ramalingam Raju, the chair 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 culpability in hiding tidings that he had inflated the amount of cash steady the balance sheet of India’sitting fourth-largest IT company by nearly $1 billion, incurred a liability of $253 million on funds arranged by him as to one’sitting person, and overstated Satyam’session September 2008 quarterly revenues by 76% and profits by means of 97%. After submitting his resignation, Raju ended his letter by apologizing because of his inability to close what began as a "marginal rift between operating profits and the one reflected in the books of accounts" but grew unmanageable. "I am now prepared to bring under rule myself to the laws of the land and face the consequences thereof," he wrote.

The letter shocked and angered corporate India, which has looked to IT executives as role models for a of recent origin breed of Indian entrepreneur. The benchmark Sensex stock index dropped 7.3% and Satyam shares fell nearly 78% on the day as investors fled in droves. Goldman Sachs (GS) suspended its recommendations on Satyam "because there is not currently a sufficient basis for determining an investment rating or estimation mark for this company," Goldman analysts Julio Quinteros Jr. and Vincent Lin told investors. Earnings per share, warned JPMorgan (JPM) analysts in a report, "may subsist 70%-80% lower than reported numbers and unison estimates since ‘09-’10." Satyam had become "India’s Enron," said CLSA India analyst Bhavtosh Vajpayee, calling the envelop "an accounting fraud beyond imagination [and] an embarrassing and shocking episode in Indian corporate governance."

As executives at other Indian outsourcing companies nervously appraise what impact the reproach will have on them, many industry observers now argue that the Satyam case desire damage India’s reputation in the manner that a reliable provider of IT services. Because of the Satyam scandal, they presume, Indian rivals testament reach under greater scrutiny by regulators, investors, and customers. "The bubble is going to burst in terms of trust," says a fund comptroller in Hong Kong who has followed Satyam closely. Doubts about the reliability of Indian outsourcers are especially important, since customers often allow the Indian companies access to sensitive systems. "This industry doesn’familiarily just make widgets," the manager explains. "It’s any intimate kinship." Certainly, says Gartner (IT) algebraist Diptarup Chakraborti, "there will be caution in the imperfect term, incredulity, and questioning." After all, "no person wants to do business with a known fraudster."

Industry executives are desperately fatiguing to contain the fallout. "The decline in governance and institutions represents a serious challenge 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’s actions should not vitiate the entire Indian IT industry. And Mohandas Pai, head of human resources at Infosys (INFY) and the company’s former cardinal 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 appear at Satyam as an isolated inflection, and slip on’t determine the developments would have any impact upon India’sitting No. 1 position as an offshore location."

Still, investors and clients are going to want answers. For instance, they’re demanding to know how Satyam’s auditor, PricewaterhouseCoopers, endorsed the company’s accounts. "Auditors’ sharing in what seems to be a multiyear misstatement of financials inclination also be explored," said CLSA’s Vajpayee in his Jan. 7 report. Already, India’s Registrar of Companies had begun a verify into a failed acquisition utmost month by Satyam of companies run by Raju’s two sons. Now the country’s securities regulator resolution add its weight by investigating the PwC audit. PwC issued a statement saying it was examining the issue.

Raju’s confession is the latest in a rocky ride for Satyam, its shareholders, and its stakeholders over the past year. The company’sitting 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 found Satyam employees had hacked into its system and gained access to easily affected information. It besides 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 small in number hours later while burdened with shareholder urgency. Satyam ADRs depraved 50% of their value overnight. December too brought news of pending litigation by a author retainer, online mobile-payments service Upaid Systems, that filed a action of mental fraud and forgery against Satyam in 2007; a Texas solicitation is scheduled to conduct a hearing on the case Jan. 7.