Satyam’s Raju Faces Charges as Government Reconstitutes Board

By Harichandan Arakali and M.C. Govardhana Rangan

Jan. 10 (Bloomberg) -- Satyam Computer Services Ltd. founder Ramalinga Raju and his brother Rama faced charges of criminal conspiracy and breach of trust in an alleged $1 billion fraud as the government assembled a new company board.

C.B. Bhave, chairman of the Securities & Exchange Board of India, met Corporate Affairs Minister Prem Chand Gupta in New Delhi following the arrest of the brothers late yesterday. The government sacked the board members of the company, India’s fourth-largest software exporter, for failing to deliver and said a reconstituted one would meet in seven days.

“A company without a board is like a headless chicken,” said Kiran Karnik, former president of the National Association of Software and Service Companies, a lobby group. “Satyam needs people with credibility, integrity to retain customers and employees. You also need legal protection for those who come on board from future lawsuits.”

A new management may help Hyderabad-based Satyam to retain customers, including Telstra Corp., and safeguard the jobs of the 53,000 people it employs. Satyam Computer was sued by investors in at least three class-action lawsuits in federal court in the U.S. following the plunge in its shares after Raju said he falsified accounts “for several years” and quit.

“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.”

Judicial Custody

Raju, 54, and his younger brother were produced before a Hyderabad city magistrate who remanded them to judicial custody until Jan. 23, his lawyer S. Bharat Kumar said today.

The offences carry a maximum sentence of 10 years and the brothers can’t apply for bail, Inspector General V.S.K. Kaumudi said in the southern city.

The scandal, whose scope is being likened to the 2001 bankruptcy of Enron Corp., has shaken confidence in Indian companies and accounting standards.

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.

“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 yesterday. “The government is committed to punish everyone found guilty, including the auditors.”

Officials have seized documents and the nation’s accounting body is examining auditor PricewaterhouseCoopers LLC’s local unit.

Audit Evidence

Satyam canceled a board meeting scheduled for today after the board was replaced, it said in an e-mailed statement. Ten directors nominated by the government will meet next week to appoint managers at Satyam, Gupta said.

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 that Satyam’s accounts were supported by “appropriate audit evidence.”

The scandal eroded $2.2 billion in shareholder wealth, drawing calls from executives and auditors to accelerate the investigation. After chairman Raju claimed Jan. 7 he’d padded Satyam’s books, the company’s auditors and interim management had yet to confirm any irregularities.

Satyam fell 41 percent to 23.75 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.

Investor Confidence

The ADRs, each of which represents two ordinary Satyam 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.

The announcement by the government on reconstituting the Satyam board will also reinforce stakeholder confidence, the National Association of Software and Service Companies said in an e-mailed statement.

Lazard Asset Management LLC increased its stake in Satyam on Jan. 7 to 5.3 percent from 4.79 percent, while Aberdeen Asset Managers Ltd. and Fidelity Management & Research Co. sold their holdings. Lazard is holding shares on behalf of clients and the acquisition of the shares was not for obtaining control of the company, it said in a filing to the Bombay Stock Exchange today.

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.

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.”

Satyam’s Chief Financial Officer Srinivas Vadlamani is being questioned by the police, Inspector General V.S.K. Kaumudi said. The police is in touch with the stock market regulator and the Registrar of Companies and is helping with their investigations, 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.

“It’s the prime concern of the government to ensure the operations of the company continue uninterrupted,” Gupta said.

Satyam 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.

Canvas Sheets

Telstra, Australia’s largest telephone company, said Jan. 8 that Satyam’s disclosure will be a factor when it cuts two out of its four major information technology suppliers this year.

Outside the group’s corporate headquarters, four canvas sheets about 6 feet by 8 feet were 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; M.C. Govardhana Rangan in Mumbai at grangan@bloomberg.net.