* Satyam chairman resigns, says had inflated profits
* Revelation could hurt foreign portfolio inflows - traders
* Satyam shares dive 78 pct on heavy volume of 143 mln shares (Updates to close)
By Ami Shah
MUMBAI, Jan 7 (Reuters) - Shares in Satyam Computer Services SATY.BO plunged more than three-fourth on Wednesday after the Indian outsourcer said it had overstated profits for many years, dragging Indian shares to their first loss in the new year.
The main stock index fell 7.25 percent, its biggest fall in more than two months, as the worst corporate scandal in memory triggered concerns it might scare foreign investors away from India just when they were showing signs of picking up.
Ramalinga Raju, chairman of Satyam, India's fourth-largest outsourcer, resigned and said in a statement the company's profits had been inflated over recent years but no other board member had been aware of the financial irregularities.
"The gap in the balance sheet has arisen purely on account of inflated profits over a period of the last several years," Raju said, adding he was prepared to face up to the legal consequences. [ID:nBOM368072]
Traders said the revelation could hit foreign investment.
"I think from the investors' point of view, there would be a serious knee-jerk reaction. People might use it as a reason to get out of India," said Deven Choksey, chief executive at broker K R Choksey.
Satyam closed down 77.7 percent at 39.95 rupees after plummeting 83 percent at one stage to 30.7 rupees which was its lowest in just over 10 years.
It was the heaviest traded stock, clocking a volume of 143 million shares or a quarter of the total 575 million shares.
The latest disclosures came after the company's botched attempt last month to buy two construction firms in which the company's founders held stakes and key customer World Bank dropping its ties with the outsourcing company.
"It's always been an issue, but in a bull market people forgot about it," said Ashish Goyal, chief investment officer at Prudential Asset Management in Singapore, referring to corporate governance.
"In a bear market chickens are coming home to roost, so it gets highlighted at a time like this."
The 30-share BSE index ended down 749.05 points at 9,586.88, snapping a four-day winning streak. It had risen 1.3 percent early before the Satyam disclosures.
Twenty-five of its components fell, while in the broader market losers beat gainers by a ratio 5:1.
Amongst other outsourcers, bellwether Infosys Technologies (INFY.BO) and Wipro (WIPR.BO) rose 1.7 percent and 0.2 percent respectively, while Tata Consultancy Services (TCS.BO) closed 0.8 percent lower.
Traders said investors locked in profits in some stocks that had risen sharply in recent days, before the quarterly earnings kick off with Axis Bank (AXBK.BO) reporting on Friday and a market holiday on Thursday.
Energy group Reliance Industries (RELI.BO), the top listed company, dropped 12.5 percent to 1,196.80 rupees, after rising 11.2 percent in the past four sessions, while ICICI Bank (ICBK.BO) shed 10.5 percent to 468.05 after rising 16.7 percent this year.
The 50-share NSE index .NSEI closed down 6.2 percent at 2,920.40.
STOCKS THAT MOVED
* Gujarat NRE Coke (GJNC.BO) rose 7.4 percent to 32.05 rupees on market talk the metallurgical coke producer was likely to get a major export order. A company official said an export order was expected but could not give details.
* Ashok Leyland (ASOK.BO) fell 5.5 percent to 15.40 rupees after the bus and truck maker said its December vehicle sales in the domestic market fell 74 percent.
MAIN TOP 3 BY VOLUME
* Satyam Computer on 143 million shares
* Suzlon Energy (SUZL.BO) on 30.9 million shares
* Unitech (UNTE.BO) on 28.8 million shares
FACTORS TO WATCH * Indian rupee drops as shares fall on Satyam [INR/] * Indian bond yields near 1-mo high on supply concerns [IN/] * FOREX-Dollar rally loses traction, euro still vulnerable[FRX/] * UPDATE 1-Oil falls towards $48, eyes U.S. inventory data
[O/R] * GLOBAL MARKETS-Europe bucks world stock rally, dollar falls [MKTS/GLOB] * U.S. stock index futures signal dip; Alcoa eyed [.N] * For closing rates of Indian ADRs INADR (Editing by Ranjit Gangadharan)