The boss of Satyam, India's fourth-biggest software firm, has quit after revealing false accounts including some $1bn (£663m) in fictitious reserves.
Chairman Ramalinga Raju apologised and said "the gap in the balance sheet has arisen purely on account of inflated profits" during several years.
He said he was subjecting himself to the laws of the land and would "face the consequences".
India's benchmark index fell nearly 7% on the news, as Satyam stock shed 82%.
In a letter to the board of directors, Mr Raju said that neither he nor the managing director took any money from the company and did not benefit in financial terms following the "inflated results".
He added that no board member had been aware of the situation the firm was in.
"What started as a marginal gap between actual operating profits and the one reflected in the books of accounts continued to grow over the years," said Mr Ramalinga's statement, which was sent to the stock exchange.
"It was like riding a tiger, not knowing how to get off without being eaten," he said.
Satyam specialises in business software and benefited from the IT outsourcing boom.
"We have to go beyond this letter and find out what actually has happened," the Securities and Exchange Board of India told reporters.
"This is an issue which has very serious implications... It also raises the issue of authenticity of accounts that have been audited and certified by the auditors."
Hitesh Agrawal, head of research with Angel Broking, said: "Indian corporate governance standards have been put at stake here, the role of the auditors have also come under serious question".
The BBC's Sanjoy Majumder in Delhi says analysts see this as one of the worst crises to have hit corporate India, at a time when the country was hoping to attract foreign investors looking for quick gains in emerging markets.
Our correspondent says many fear that the international community will now take a harder look at Indian companies and think twice about placing their money there.
The news comes after plans to acquire Maytas Properties and plans to acquire a 51% stake in Maytas Infra failed.
"The aborted Maytas acquisition deal was the last attempt to fill the fictitious assets with real ones," said the letter.
Mr Raju said a task force investigating the failed deal had been set up. He also recommended to the board that Merrill Lynch be entrusted with the talk of "quickly exploring" merger opportunities.
BBC correspondent Karishma Vaswani in Mumbai says the consequences for corporate India are extremely dire, given that Satyam is not just listed on Indian stock markets, but was also the first Indian technology firm to list in New York.
Satyam said its managing director and co-founder B Rama Raju, Raju's brother, had also resigned. The company did not give any reason for the resignation.
Just three months ago, Satyam received an award from a group of Indian directors for excellence in corporate governance.