Update: Indian outsourcing CEO resigns after faking results

The chairman of Indian outsourcer Satyam Computer Services has resigned today (7 January), admitting that the company inflated its financial results.

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The chairman of Indian outsourcer Satyam Computer Services has resigned today (7 January), 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 several years, Raju said. Satyam is listed in India and the US, it has substantial contracts in Europe, including a partnership with Fujitisu to provide IT services to Reuters. The company is also sponsor of next year's World Cup.

The UK comprises just over half of Satyam’s European revenues, which puts it at around £130m over the past twelve months, according to Anthony Miller of UKHotviews . Satyam has a focus on SAP work and Miller said it “has won a couple of ERP-type deals in local government (Kent County Council and Stevenage Borough Council).”

Commenting on today’s news, Miller said, “Just a few months ago I met many of Satyam’s UK and European management and heard glowing reports from key clients.

“There is also a small risk that other leading Indian SIs will be irrationally tarred with the same brush. This is a sad, sad, day for Satyam and for the Indian offshore services industry.”

For the quarter ended September 30, Satyam reported revenue of 27 billion Indian rupees (£374m) and an operating profit of 6.5 billion rupees (£9m), 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 surfaced after the company announced on 16 December 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 23 December 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 has today terminated its agreement with Satyam.

Analysts and investors say Satyam should now put itself up for sale. 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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