By Harichandan Arakali and Kartik Goyal
Jan. 10 (Bloomberg) -- Satyam Computer Services Ltd. chairman Ramalinga Raju and his brother Rama were arrested and the remaining directors of the software exporter sacked as India started investigating an alleged $1 billion fraud.
The brothers were detained on charges including forgery, breach of trust and criminal conspiracy, Inspector General V.S.K. Kaumudi told reporters in the southern city of Hyderabad.
Officials have seized documents and the nation’s accounting body is examining auditor PricewaterhouseCoopers LLC’s local unit, Corporate Affairs Minister Prem Chand Gupta said.
“The developments so far indicate that the current board of Satyam has failed to do what it was supposed to do,” Gupta told reporters in New Delhi. “The government is committed to punish everyone found guilty, including the auditors.”
Satyam, India’s fourth-largest software exporter, plunged for a second day yesterday in Mumbai trading on concern it may run out of money after Raju said he falsified the accounts “for several years.” The scandal, whose scope is being likened to the 2001 bankruptcy of Enron Corp., has shaken confidence in Indian companies and accounting standards.
“The fact that the audited accounts don’t represent true and fair picture raises an issue that is bigger than the Satyam scandal,” said M. Damodaran, former chairman of the Securities and Exchange Board of India. “If some guy has taken liberties with the system, the person or persons has to be identified and punished.”
Bank Statements
The government will obtain records of Satyam’s financial transactions from banks, minister Gupta said in televised comments after the Times of India newspaper reported today that the company’s bank statements were missing.
Houston-based Enron’s 2001 bankruptcy wiped out more than 5,000 jobs and $1 billion in employee retirement funds. The Enron scandal triggered tougher U.S. accounting rules and the creation of a board to oversee auditing firms that review the financial statements of publicly traded companies.
Ten directors nominated by the government will meet next week to appoint managers at Hyderabad-based Satyam, Gupta said.
Satyam canceled a board meeting scheduled for today after the board was replaced, it said in an e-mailed statement.
Interim Chief Executive Officer Ram Mynampati said Jan. 8 he was unaware of the false accounting that may force Satyam to restate earnings as he relied on audited statements. The local unit of PwC said in a statement the same day Satyam’s accounts were supported by “appropriate audit evidence.”
Eroded Wealth
The scandal has eroded $2.2 billion in shareholder wealth, drawing calls from executives and auditors to accelerate the investigation. More than two days after chairman Raju claimed he’d padded Satyam’s books, the company’s auditors and interim management had yet to confirm any irregularities.
Satyam fell 17.35 rupees to 22.9 rupees yesterday. The Bombay Stock Exchange removed Satyam from its benchmark Sensitive index, a day after the National Stock Exchange dropped the stock from the Nifty.
The company was sued by investors in at least three class- action lawsuits in federal court in the U.S. after the shares in Mumbai plunged. Satyam’s American depositary receipts, each of which represents two ordinary shares, fell $8.42, or 90 percent, to 93 cents before the opening of the New York Stock Exchange on Jan. 7, when trading was halted.
Turning Point
“We believe the Satyam incident marks a turning point in investors’ attitude toward corporate governance,” Suresh Mahadevan, an analyst at UBS AG, said. “In future, companies perceived poor on corporate governance or following aggressive accounting practices will trade at larger discounts compared to their peer group.”
India’s stock market regulator plans to review working papers of auditors at companies forming the nation’s main stock indexes, the regulator said in a statement in Mumbai. The Securities and Exchange Board’s Committee on Disclosures and Accounting Standards will hold a peer review of the auditor’s working papers on quarterly and full-year financial statements.
Raju had planned to meet investigators from the Securities and Exchange Board today, his lawyer S. Bharat Kumar said before the arrests. Raju had been summoned by regulators yesterday though wasn’t given sufficient notice, he said.
Raju, 54, and his younger brother will be produced before a magistrate within 24 hours, inspector general Kaumudi said. The offences carry a maximum sentence of 10 years and the brothers can’t apply for bail, he said.
Government officials have seized Satyam’s documents and a team from the ministry of corporate affairs has started inspecting eight group companies, Gupta said.
Prime Concern
“It’s the prime concern of the government to ensure the operations of the company continue uninterrupted,” Gupta said.
Satyam employs about 53,000 people and has offices from the U.S. to the U.K., Brazil and Australia. The company writes software and manages computer systems for clients including ArcelorMittal, the world’s largest steelmaker, and Nissan Motor Co., Japan’s third-biggest carmaker.
The announcement by the government to reconstitute the Satyam board will also reinforce employee and stakeholder confidence, the National Association of Software and Service Companies, a lobby group, said in an e-mailed statement.
‘Buy Satyam’
Outside the group’s corporate headquarters, four canvas sheets about 6 feet by 8 feet are draped with employees’ signatures, handprints and messages.
“Satyam will come back,” one message reads. “Save Satyam, save Raju,” says another. A third, “Buy Satyam Stock.” On each of the red, green, yellow and blue-painted canvases is printed “The Spirit of Satyam,” like a watermark.
“This current management needs to go so that the 50,000 jobs are saved and client commitments are kept,” Richard Rekhy, chief operating officer of KPMG in India, said. “It is the image of India and corporate India at stake.”
The fall of Raju, named Ernst & Young Entrepreneur of the Year in 2007, began three weeks ago when Satyam proposed paying $1.6 billion for Maytas Properties Ltd. and Maytas Infra Ltd., both tied to his family. The plan was scrapped 12 hours later, after investors called it a “woeful misuse of cash.” Raju said the sale was designed to plug the hole in Satyam’s balance sheet.
“To my non-auditor mind it is reasonably clear that something like this could not have been hidden from audit for so long,” former regulator Damodaran said.
To contact the reporters on this story: Harichandan Arakali in Bangalore at harakali@bloomberg.net; Kartik Goyal in New Delhi at kgoyal@bloomberg.net.
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