Indian government takes control of Satyam's board

Blocks existing directors from taking actions, says it will appoint 10 new members

The Indian government announced Friday that it was taking control of the board of directors at scandal-wracked Satyam Computer Services Ltd., two days after the offshore outsourcer's founder and now-former chairman admitted to accounting fraud.

The government canceled a Satyam board meeting that had been scheduled for Saturday and said it would restrain the company's current directors from taking any actions. Instead, the government plans to appoint 10 of its own nominees to Satyam's board.

The canceled meeting had been expected to include a discussion on adding new members to the board, which saw its membership reduced by a flurry of resignations in December over a scuttled proposal to acquire two construction companies. Other likely agenda items included a possible vote to formally name Satyam executive and board member Ram Mynampati CEO; he was appointed to that position on an interim basis this week.

Satyam was plunged into a crisis that calls its future viability into question on Wednesday, when Chairman B. Ramalinga Raju resigned after admitting that the company's profits had been inflated for several years.

Raju surrendered late today, Indian time, to the police in Hyderabad, where Satyam's headquarters is located, according to a report by India's NDTV 24X7 television news channel. His brother, B. Rama Raju, also resigned as Satyam's managing director on Wednesday and was said to have been arrested today as well.

At a press conference in Hyderabad on Thursday, Mynampati warned that the liquidity of the company's balance sheet was "not very encouraging at this point." Mynampati said Satyam officials were working on various options to improve the company's financial position, but he didn't provide any details as to how he planned to raise more cash.

In a report issued yesterday, analysts at Forrester Research Inc. said that Satyam's ability to continue as an independent entity "is in doubt." They predicted that customers and employees alike "will desert Satyam," and that the outsourcer will most likely be sold as a whole or in separate pieces.

The Forrester analysts added that the Satyam debacle likely will be a setback to India's entire outsourcing industry, which has tried to build a solid business image to help attract more offshoring work — an effort that already may have taken a hit following the terrorist attacks in Mumbai in late November.

The National Association of Software and Services Companies, India's largest IT trade group, said in a statement that it thinks the government's decision to take charge of the situation at Satyam will strengthen the confidence of employees and other stakeholders in the company.

Government officials haven't disclosed what they plan to do after appointing the new board members. Analysts said the government will likely ask for a re-audit of Satyam's financial accounts, while at the same time looking out for potential buyers or new investors.

The Securities and Exchange Board of India, that country's securities regulator, already had launched an investigation of Satyam following Raju's disclosure. Meanwhile, two U.S. law firms have filed class-action lawsuits against the company in federal court in New York, on behalf of investors who hold American Depositary Receipts for shares of Satyam's stock.

Copyright © 2009 IDG Communications, Inc.

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