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India's Satyam head arrested, board scrapped

09/01/09

By Sumeet Chatterjee

HYDERABAD, India (Reuters) - 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.

Chairman Ramalinga Raju, who resigned on Wednesday after revealing years of accounting fraud, was expected to appear before India's market regulator on Saturday.

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 records and forgery, Reuters was told by S.S.P. Yadav, police chief of the southern Andhra Pradesh state, whose capital, Hyderabad, is home to Satyam.

Officials with India's Registrar of Companies searched Satyam's offices and seized papers and electronic documents, the company said late on Friday in a filing with the U.S. Securities and Exchange Commission.

Earlier, 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 at this time to take over Satyam's management, 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 investors' concerns, 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, 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 <.BSESN> 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 January 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 specializes in business software and back-office services for clients including General Electric and Nestle .

National Australia Bank Ltd 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 leading engineering and construction company, 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 when L&T 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 been filed in the United States on behalf of investors who bought Satyam American Depository Receipts (ADRs) in the last five years.

($1=48.3 rupees)

(Reporting by Sumeet Chatterjee; Additional reporting by Janaki Krishnan in Mumbai, Miranda Maxwell in Melbourne, Rajkumar Ray in New Delhi and Jim Finkle in Boston; Editing by Toni Reinhold)

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