Hyderabad / New Delhi: 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%.
Corporate affairs minister, Prem Chand Gupta, on Thursday said the government will take the strictest possible action in a coordinated manner to deal with the situation.
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“I had a meeting with the senior officials from the ministry of finance, Sebi, the ministry of law and justice and the ministry of information and technology. We had a joint meeting and we are taking coordinated action in a very firm manner and there would be no laxity on anybody’s part,” he said.
Noting that the market regulator Sebi and the Registrar of Companies (RoC) are already on the job, the minister said, “as far as the auditors are concerned we have asked ICAI to take strictest possible action against the erring auditors.”
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 employees shuffled into its Hyderabad office as usual on Thursday, refusing to speak to reporters outside the gates.
Media persons stand outside the headquarters of Satyam Computer in Hyderabad on January 08, 2009. Reuters photo
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.
Stocks in India did not trade on Thursday due to a public holiday. Bombay’s benchmark stock index tumbled more than 7% on Wednesday and the rupee fell after the Satyam bombshell, which some analysts dubbed ”India’s Enron” after the collapsed US 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.
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% 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.