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Satyam head arrested, board scrapped

Saturday, January 10, 2009 , Posted by Linda at 10:37 AM

The chairman of Satyam Computer Services was arrested on Friday on charges of cheating and forgery, and the government dissolved the outsourcer's board as authorities moved to limit fallout from India's biggest corporate scandal.

A security guard stands outside the head office of Satyam Computer Services in Hyderabad in...

Chairman Ramalinga Raju, who resigned on Wednesday after revealing years of accounting fraud, was expected to appear before the market regulator on Saturday. The events have called into question the future of the outsourcing company,

In a late night development, Raju and his brother B. Rama Raju, Satyam co-founder and managing director, were arrested on charges of criminal breach of trust, criminal conspiracy, cheating, falsification of record and forgery, Reuters was told by S.S.P. Yadav, police chief of Andhra Pradesh, whose capital Hyderabad is home to Satyam.

Earlier in the day, Corporate Affairs Minister Prem Chand Gupta said the government would appoint 10 new members to the Satyam board, which would meet within seven days. There was no move to take over Satyam's management at this time, he said.

"The government is considering appointment of suitable persons as directors of Satyam," Gupta told a news conference in New Delhi. "We are determined to reach the truth but are equally concerned with the fate of employees and other stakeholders."

A Satyam spokeswoman said the company welcomed the government's decision, which would restore the confidence of all employees, customers and shareholders. However, she said Satyam had no comment on the arrests.

In a bid to ease the worries of rattled investors, the Securities and Exchange Board of India said auditors' certification of corporate results from the December quarter would be peer reviewed.

The government barred Satyam's board from holding its scheduled meeting on Saturday, which was called to consider options such as inviting a takeover or strategic investor and appointing an investment banker.

Analysts said Satyam's very existence was threatened by the scandal, which stand-in Chief Executive Ram Mynampati said has pushed the company into a crisis of unimaginable proportions.

Satyam shares slumped to 11.50 rupees (24 U.S. cents), their lowest since March 1998 and a far cry from a 2008 high of 544 rupees, before ending down 40 percent at 23.85 rupees ahead of the board's dissolution.

The company's market value has shriveled to $330 million, from more than $7 billion six months ago.

NONEXISTENT CASH

The chief financial officer offered to resign after Raju's admission that profit had been overstated for years and that about $1 billion, or 94 percent of the cash and bank balances on Satyam's books at end-September, did not exist.

"There's a big question mark over everything. We don't know what kind of business model they have now," said Amar Ambani, vice-president of research at broker India Infoline.

"Raju's declaration says that at the operating level the margin was 3 percent, so at the net level it must have been a loss, which makes it extremely unviable. They have been borrowing to pay salaries, which means they have no cash at all," Ambani said.

The stock has fallen 87 percent in two trading days, pulling the broader market down. Shares in Satyam's main rivals, Infosys, Tata Consultancy Services and Wipro rose on expectations they would benefit from Satyam's circumstances.

Satyam will be cut from India's benchmark stock index, the Bombay Stock Exchange's 30-share Sensex from Monday.

Analysts said recent hopes that Satyam could survive by being taken over had been dashed, given the scope of the scandal and potential for big legal losses.

"The largest scandal in India's corporate history calls into question the viability of the company as an independent entity," consultancy Forrester said in a Jan. 8 research note.

"As a result, sourcing and IT executives need to actively review their exposure to the company and their options as a cloud of uncertainty hangs over the company.

"Both clients and employees will desert Satyam as a result of competitive wooing," it said.

Satyam specialises in business software and back-office services for clients including General Electric and Nestle.

National Australia Bank Ltd, Australia's top lender, said it was reviewing a contract with Satyam for system development and support to 2011.

L&T SITTING PAT

The chairman of Larsen & Toubro, India's top engineering and construction firm, said the uncertainty around Satyam meant L&T had no plans to alter its near 4 percent stake in the outsourcer, which it built up in early January.

"When we invested, our idea was to strike some sort of go-to-market strategy, some sort of strategic alliance, if it was possible," A.M. Naik told CNBC TV18. He noted that Satyam's share price was about 188 rupees before Raju's resignation bombshell, far higher than the price at which L&T had bought it.

Naik did not rule out an alliance with Satyam once there was clarity on its losses and liabilities, including any from law suits. L&T runs a mid-sized outsourcing unit called L&T Infotech.

Several securities fraud class action lawsuits have already been filed in the U.S. on behalf of investors who bought Satyam American Depository Receipts (ADRs) in the last five years.

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