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India vows to end fraud as Satyam scandal rocks

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%.

Investigators are expected to swoop on the company's headquarters in Hyderabad in southern India to search for clues on how the fraud could have been hidden for so long.

“We are concerned about what has happened in Satyam, and the government will take all necessary action to ensure these types of scandals do not take place again. Whatever steps could be taken will be taken,” Corporate Affairs Minister Prem Chand Gupta told Reuters late on Wednesday.

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 A BIG LIE,” the Economic Times said in a huge headline on its front page, adding “The shame and scandal has stunned India Inc.”

Satyam employees shuffled into its Hyderabad office as usual on Thursday, refusing to speak to more than a dozen reporters camped outside the gates.

The government has asked the registrar of companies in Hyderabad to file a report, while the stock market regulator has ordered a probe into buying, selling and dealing in the company's shares. 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 Indian 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 1990's, 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 proactively addressing customers' concerns and telling them it is business as usual.”

Satyam specializes in business software and back-office services for clients such as General Electric and Nestle.

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.

The company's difficulties multiplied when the World Bank, a major customer, barred Satyam from new business, citing “improper benefits” given to Bank officials.

“It was like riding a tiger, not knowing how to get off without being eaten,” Raju said in his letter. (Reuters)