India's Madoff? Satyam Scandal Rocks Outsourcing Industry

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 culpability in hiding news that he had inflated the amount of cash on the balance sheet of India's fourth-largest IT company by nearly $1 billion, incurred a liability of $253 million on funds arranged by him personally, and overstated Satyam's 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 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 new 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 price target for this company," Goldman analysts Julio Quinteros Jr. and Vincent Lin told investors. Earnings per share, warned JPMorgan (JPM) analysts in a report, "may be 70%-80% lower than reported numbers and consensus estimates for '09-'10." Satyam had become "India's Enron," said CLSA India analyst Bhavtosh Vajpayee, calling the case "an accounting fraud beyond imagination [and] an embarrassing and shocking episode in Indian corporate governance."