The Satyam scandal has shocked India. It is being called India's Enron.

Many in the financial circles are dismayed that the biggest-ever corporate fraud in the country could have escaped unnoticed for so many years. It has brought into question the levels of corporate governance in the country, and has cast an ugly shadow on the once shining image of Indian industry overseas. Investors stunned For the last couple of days outside the Bombay Stock Exchange, all anyone can talk about at the chai stalls and sandwich stores is how Ramalinga Raju, the former boss of Satyam Computers, managed to rack up a billion-dollar fraud right under their noses. Investors in Indian shares were stunned by Mr Raju's revelation, in a letter to the stock exchange this Wednesday, when he confessed his wrongdoing and admitted that he had effectively cooked the books of his firm for the last several years. Satyam's shares plummeted on the news by 75%, dragging down India's stock main market by 7%. The scandal has dominated conversation at the "I can't believe it," says investor Rajiv Gupta stock market. outside the stock market. "It's very worrying, and it's happened at the worst possible time. Markets here were just started to look like they were recovering. But this news - it is very very bad." Ashok Bakliwal, another investor, agrees: "This will put the spotlight on Indian companies, and overseas investors will be wary of putting their money here without taking a good, hard look at the company's books." "As if India wasn't going through enough of a bad time - now this? I really don't know what will happen next. How could a fraud of this magnitude take place and go unnoticed? " What went wrong? It's a question that everyone is asking. The controversy has got many in corporate circles It's a wake-up call here wondering whether it was India's new found love affair with capitalism that led to Satyam's downfall. Chanda Kochar, joint managing director, ICICI In the letter to his shareholders, Mr Raju says that Bank he was trying to cover up the losses at Satyam, and in doing so got caught up in a vicious cycle of lies and debts. He says this attempt to hide the losses from investors and shareholders was like "riding a tiger, not knowing how to get off without being eaten". According to Mr Raju's statement, about $1bn (0.65bn), or 94% of the cash on the company's books, was made up - and analysts say it was the manipulation of the cash flow which could have been one reason why the deceit was undetected. Many analysts also say that the chase for huge profits, and the desire to keep up with the break-neck speed of India's $50bn outsourcing industry's growth rates that may have been behind Mr Raju's motivation in fudging the accounts at his firm. Disappeared

But trying to get any answers from Mr Raju since his confession letter is proving to be impossible he has disappeared. A company spokesperson has been quoted as saying that his whereabouts remain unclear for now. At a company press conference on Thursday, the acting chief executive Ram Mynampati told journalists that he and other board members had no knowledge of the financial fraud and were hoping to get back to business as soon as possible. Investors fear the accounting scandal will hurt India's reputation. "Our only aim at this time is to ensure that the business continues," Mr Mynampati says. But it will be some time before it is business as usual for the troubled tech firm. Indian media is reporting that financial regulators have despatched investigators to Hyderabad to launch a formal investigation into the case. India's main stock exchanges have announced they are removing Satyam Computers from their indices as of January 12 because of the stunning revelations Leading members of Indian industry have also expressed their shock and disappointment that such an audacious act of deception could take place. Chanda Kochar, the joint managing director of ICICI Bank, one of India's biggest lenders, says she is shocked by the news. "It's a wake-up call - but I would like to say that it's important to remember this is an isolated event and shouldn't be seen as a barometer for the general level of corporate governance in India," she says. "But it is also important for us to monitor the auditors and the other players in this scandal, and for us to become a lot more careful." Investor flight? But caution alone may not be enough to convince international investors that Indian companies are serious about cleaning up their governance Many of Satyam's customers were persuaded to get into business with the company because of Mr Raju's suave, professional image. The Western educated MBA graduate was one of the poster boys of India's new economy. But with his whereabouts unclear, and investigations continuing, the shock waves of this scandal will continue to damage the image of corporate India overseas.

In the morning of Jan. 7,Ramalingam Raju, the chairman of troubled Indian IT outsourcingcompany 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." As executives at other Indian outsourcing companies nervously assess what impact the scandal will have on them, many industry observers now argue that the Satyam case will damage India's reputation as a reliable provider of IT services. Because of the Satyam scandal, they say, Indian rivals will come under greater scrutiny by regulators, investors, and customers. "The bubble is going to burst in terms of trust," says a fund manager 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't just make widgets," the manager explains. "It's an intimate relationship." Certainly, says Gartner (IT) analyst Diptarup Chakraborti, "there will be caution in the short term, skepticism, and questioning." After all, "no one wants to do business with a known fraudster."

INVESTORS WANT ANSWERS

Industry executives are desperately trying 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 infect the entire Indian IT industry. And Mohandas Pai, head of human resources at Infosys (INFY) and the company's former chief 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 look at Satyam as an isolated case, and don't think the developments would have any impact upon India's 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' complicity in what seems to be a multiyear misstatement of financials will also be explored," said CLSA's Vajpayee in his Jan. 7 report. Already, India's Registrar of Companies had begun a probe into a failed acquisition last month by Satyam of companies run by Raju's two sons. Now the country's securities regulator will 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's clients include multinationals such as Nestl, 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 sensitive information. It also 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 few hours later under shareholder pressure. Satyam ADRs lost 50% of their value overnight. December also brought news of pending litigation by a former client, online mobile-payments service Upaid Systems, which filed a case of intellectual fraud and forgery against Satyam in 2007; a Texas court is scheduled to conduct a hearing on the case Jan. 7.

TIP OF THE ICEBERG

In India, the Raju family's non-IT activities had already been viewed with some suspicion, in particular a free emergency ambulance service Raju began in Hyderabad, where Satyam is based. Last year, public-interest activists filed a petition challenging the lack of transparency and arbitrariness in the award of ambulance-services contracts in 12 Indian statesall of which had been awarded to Raju's operation. In November the Supreme Court of India questioned the contracts and demanded an explanation, which could result in the contracts being canceled. With Satyam's management focused elsewhere, business suffered. Clients complained about lack of attention, and many professional managers began to leave.

Angry Satyam investors' reaction to the botched acquisition led to talk of Satyam being a takeover target. A deal might have been interesting since, as Gartner's Chakraborti says, Satyam had been undergoing a "crisis of confidence, rather than a crisis of revenues." Before the shocking confession today from Raju, there was a long list of reported suitors for Satyam. They included HCL Technologies, Wipro, IBM (IBM), Hewlett-Packard (HPQ), Larsen & Toubro Infotech, Cognizant (CTSH), Cap Gemini (CAPP.PA), and even private equity players KKR and TPG. By Jan. 6, the Indian press added a new oneTech Mahindra, a Pune-based software-services company focused on the telecom industry in which British Telecom (BT.L) has a 31% stake. Although most companies denied the rumors, on Jan. 6 an executive of a rival company told BusinessWeek that Satyam's value should be between $2.6 billion and $3 billion.

COMPETITION WILL JUMP IN

Now, just a day later, Satyam's value has plummeted. Tech Mahindra made a public statement that it would not be interested in acquiring Satyam "in the current environment." CLSA India valued the company, minus its debt, at $600 million. "What happens to Satyam now?" asked Mumbai-based research firm First Global in a note on Jan. 7. "With Satyam's operations failing to generate the required amount of cash, we believe that it will be impossible for the company to continue its operations." Satyam clients are likely to shift to other companies, First Global predicted, as Satyam's stock price continues to fall. That leaves Ram Mynampati, the Satyam president whom Raju has appointed as interim chief executive, the difficult task of boosting morale. In a letter to Satyam's 53,000 employees, Mynampati reminded them that Satyam had top-notch clients and was acknowledged as one of the three best employers in India by both Hewitt (HEW) and Mercer (MERC), the international human resources firms. But "this quarter will be tumultuous for us," he said. "Rumors will abound and it would be fair to assume that competition will try and leverage it to their advantage." The competition sure is trying. Already, Satyam customers are getting calls from other Indian IT providers offering their services. And life could get tough for Satyam's thousands of engineers and employees. Despite their valuable skills, IT companies are hiring fresh college grads over the more expensive, experienced hands. Still, with the IT business already suffering from the global downturn, a large competitor out of the way could mean more deals for Satyam's rivalsif they can overcome new doubts about the reliability of the country's IT industry.