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Former Satyam chairman arrested

Indian police on Friday arrested the former chairman of outsourcing giant Satyam Computer, days after he admitted he doctored the company's accounts to the tune of $1 billion.
Handout of Satyam Computer Services chairman Ramalinga Raju posing in his office in Hyderabad
Satyam Computer Chairman Ramalinga Raju is shown in his office in Hyderabad, India, in this undated handout photo. He resigned Wednesday after revealing years of accounting fraud which analysts said cast doubt over the future of the outsourcing company.Ho / REUTERS
/ Source: msnbc.com news services

Indian police on Friday arrested B. Ramalinga Raju, the founder and former chairman of beleaguered outsourcing giant Satyam Computer, days after he admitted he doctored the company's accounts to the tune of $1 billion.

Satyam's balance sheets were riddled with "fictitious" assets and "non existent" cash that could no longer be concealed after a deal intended to save the struggling company was abandoned, Raju admitted Wednesday in a letter to the company's board.

Raju and his brother, former managing director B. Rama Raju were arrested in the southern city of Hyderabad, according to S.S. Yadav, the top police official of Andhra Pradesh state where the company is headquartered. Hyderabad is the capital of Andhra Pradesh.

The brothers resigned their posts in the company Wednesday.

Yadav said the men were being investigated for cheating, forgery, criminal breach of trust and falsifying documents. They may face up to 10 years in prison, he said.

Government to appoint new board
The government also dissolved Satyam's board in moves to limit the fallout from India's biggest corporate scandal in memory. Earlier, India's Corporate Affairs Minister Prem Chand Gupta said the government would appoint 10 new members to the Satyam board, which would then meet within seven days.

"We are determined to reach the truth but are equally concerned with the fate of employees and other stakeholders," Gupta told a news conference in New Delhi.

Several investors in Satyam were considering suing PricewaterhouseCoopers LLC, the auditor of the company's doctored accounts, an attorney said Friday.

Satyam shares fell another 45.5 percent Friday to 21.75 rupees in Mumbai, following an 80 percent plunge Wednesday. Trading was closed Thursday because of a holiday.

"PricewaterhouseCoopers would be responsible in certain circumstances. I mean they are supposed to check on the accounts and their audit report is relied upon by various people," said Ravi Nath, a lawyer with the Rajinder Narain law firm, which has been contacted by several investors intending to sue the auditor. "On my first impression, PricewaterhouseCoopers needs to answer a few things."

The auditing firm said in the statement that they had worked "in accordance with applicable auditing standards and were supported by appropriate audit evidence."

"Given our obligations for client confidentiality, it is not possible for us to comment upon the alleged irregularities. Price Waterhouse will fully meet its obligations to cooperate with the regulators and others," the statement said.

The international accounting firm, PricewaterhouseCoopers International Ltd., is based in London.

Company will be replaced on stock index
Beginning Monday, the Bombay Stock Exchange will replace Satyam with Sun Pharmaceuticals Ltd. on India's benchmark Sensex stock index.

Top Satyam executives have struggled to reassure investors, employees and clients since news of the scandal broke.

Satyam Computer Services Ltd employs 53,000 people — among the 2 million Indians working in the country's booming high-tech industry, which last year brought in an estimated $40 billion. Satyam's clients include a slew of Fortune 500 companies including Nestle, General Electric and Ford Motors.

Ram Mynampati, the company's interim head, said the company's top executives relied on audited accounts and were "shocked" by Raju's admissions.

The company's chief financial officer V. Srinivas resigned Thursday.

Meanwhile, Archana Uttapa, a company spokeswoman, denied Indian media reports that Satyam was considering firing 10,000 of its 53,000 employees.

"There is no such move," she said.

Employee salaries have been paid through December and cleared for the month of January as well, she told The Associated Press.

IT companies hit by downturn
The scandal comes at a delicate time for India's information technology companies, which are struggling against a global slowdown and waning economic growth at home. India's IT firms derive 40 percent of their global revenues from financial services clients.

Andhra Pradesh's chief minister wrote Thursday to Prime Minister Manmohan Singh asking him to appoint a management team that could restore confidence in the company and help protect its employees and investors.

Analysts said recent hopes that Satyam could survive by being taken over had been dashed.

"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."

Holders of the company's U.S.-listed shares — which have been halted from trading on the New York Stock Exchange while regulators investigate — have filed two class action suits against Satyam, the law firms representing the investors said in separate statements.

The suits filed by Vianale & Vianale LLP and Izard Noble LLP allege Satyam and its top executives issued false and misleading financial statements and violated federal securities laws, the statements on their Web sites said.