* Chairman quits, says profits inflated
* Shares dive 78 pct in Mumbai
* Banker Merrill Lynch terminates Satyam ties
* NYSE halts trade in Satyam’s shares (Adds company comment, NYSE halt, background)
By Sumeet Chatterjee
BANGALORE, Jan 7 (Reuters) - The head of Indian outsourcing company Satyam Computer Services SATY.BO SAY.N resigned on Wednesday, disclosing that profits had been falsely inflated for years and sending its shares plunging nearly 80 percent.
India’s biggest corporate scandal in memory threatens future foreign investment flows into Asia’s third-largest economy and casts a cloud over growth in its once-booming outsourcing sector.
The news sent Indian equity markets into a tailspin, with Bombay's main benchmark index .BSESN tumbling 7.3 percent and the Indian rupee fell.
The New York Stock Exchange halted trading in Satyam’s shares indefinitely, saying it wanted to review the news.
Ramalinga Raju, founder and chairman of India’s fourth-largest software services exporter, said in a statement that Satyam’s profits had been massively inflated over recent years. He added that no other board member was aware of the financial irregularities at the Satyam, which in Sanskrit means “truth.”
“If a company’s chairman himself says they built fictitious assets, who do you believe here? This has put a question mark on the entire corporate governance system in India,” said R.K. Gupta, managing director at Taurus Asset Management in New Delhi.
Raju, who founded Satyam as a family business with his brother and brother-in-law more than two decades ago, said about $1 billion or 94 percent of the cash on the company’s books was fictitious.
The startling admission comes as investors across the globe pay more attention to oversight following last month’s arrest of Bernard Madoff over charges he swindled clients out of billions of dollars.
“In a bull market, people forgot about it (corporate governance),” said Singapore-based Ashish Goyal, chief investment officer at Prudential Asset Management. “In a bear market chickens are coming home to roost, so it gets highlighted at a time like this.”
Satyam’s auditor PricewaterhouseCoopers declined comment, saying it was investigating the matter. U.S. Securities and Exchange Commission spokesman John Nester had no comment on the matter.
The New York Stock Exchange said in a statement that it was “currently evaluating the news relating to Satyam and will continue to closely monitor further developments.”
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, a management graduate from Ohio University, said in his letter, adding he was prepared to face up to the legal consequences. [ID:nBOM368072]
Satyam said its managing director and co-founder B. Rama Raju, Raju’s brother, had also resigned. The company, which went public in 1991, did not give any reason for the resignation.
The company’s difficulties multiplied when the World Bank, a major customer, barred Satyam from new business, citing “improper benefits” given to Bank officials.
Satyam rose to prominence in the late 1990s when Raju was among the first to spot outsourcing opportunities in the year 2000 rollover problem, which saw the coming of age of the software outsourcing industry.
Just three months ago, Satyam received a Golden Peacock award from a group of Indian directors for excellence in corporate governance.
By close of trade, Satyam’s share value slumped to about $550 million from around $7 billion as recently as last June.
New York-listed Satyam specializes in business software and back-office services for clients such as General Electric (GE.N) and Nestle NESN.VX.
Satyam said in a letter to employees that it had named Ram Mynampati as interim CEO, and named a “SWAT team” of senior managers to help him run the company.
Analysts said that was unlikely to satisfy investors.
“I think there is no future for this stock. This case for India is similar to what happened to Enron in the U.S.,” said Jigar Shah, senior vice-president at Kim Eng Securities.
“It will not stop at Satyam. Many more companies will come into scrutiny like that. There is a strong possibility investments in India will be affected.”
The scandal set off a wave of condemnation from Indian market regulators and government officials, and prompted banker Merrill Lynch to terminate its engagement with Satyam.
“It’s going to impact the Indian outsourcing industry. Customers are going to be concerned about offshoring firms in India,” said Sudin Apte, country head of Forrester in the western city of Pune.
Satyam said it would go ahead with a planned board meeting on Saturday to consider a share buyback following a rash of broker downgrades even after its acquisitions were called off last month. here (Additional reporting by India bureaux, Tony Munroe in Hong Kong, Jim Finkle in Boston and Rachelle Younglai in Washington; Writing by Anshuman Daga; Editing by Jean Yoon, David Cowell and Tim Dobbyn)