Indian stocks and rupee hit by $1bn fraud at IT giant Satyam

India was shaken yesterday by one of the largest corporate scandals in its history, after the founder of giant IT group Satyam Computer Services admitted the group had become embroiled in a $1bn (£660m) accounting fraud. Byrraju Ramalinga Raju, Satyam's founder and chairman, revealed in a letter to the company's board yesterday that he had overseen years of accounting irregularities. He announced the facts "with deep regret, and a tremendous burden that I am carrying on my conscience".

The shock news from India's fourth largest outsourcing specialist, whose clients include General Electric and Nestlé, sent its shares plunging 77 per cent in Mumbai. The price fall dragged down the entire index of the Indian Stock Exchange, with the knock-on effect of weakening the rupee. Mr Raju's admission comes just weeks after a bungled attempt by Hyderabad-based Satyam to buy two companies in which its management held stakes, a move that sparked investor outrage. The company was also barred from doing business with the World Bank over different irregularities.

Yesterday, Mr Raju admitted that there were 50.4bn rupees (£684m) of "inflated (non-existent)" cash on the balance sheet of Satyam. He said the inflation of profits had started a few years ago but had spun out of control: "It was like riding a tiger, not knowing how to get off without being eaten".

"What started as a marginal gap between actual operating profit and the one reflected in the books of accounts continued to grow over the years. It has attained unmanageable proportions as the size of the company operations grew significantly," Mr Raju said. Mr Raju had pledged the family's equity stake in the firm to borrow money to cover the hole, and the disclosure was triggered as the lenders sold these shares after he failed to meet margin calls.

The revelation was a massive shock to followers of the company – whose name means "truth" in Sanskrit. It has operations in 66 countries and last year reported revenue of more than $2bn. The Securities and Exchange Board of India has launched a formal investigation and there could be action from the US Securities and Exchange Commission. Merrill Lynch, the group's banking adviser, immediately quit after the news.

The company announced yesterday that Ram Mynampati would take over as interim chief executive and that it had formed a team of senior leaders to "steer the company through this crisis". Mr Mynampati told employees: "This quarter will be tumultuous for us. Rumours will abound and it would be fair to assume that competition will try to leverage it to their advantage."

Mr Raju founded Satyam in 1987 and built the business into one of the largest outsourcing and technology providers in India, alongside companies such as Tata and Infosys.

Mr Raju said yesterday that neither he, nor the managing director, took any money from the company, or benefited in financial terms from the inflated results. He added that no one else in the company knew of the issues.