By Sumeet Chatterjee
HYDERABAD, India (Reuters) - Police arrested the head of Satyam Computer Services Friday on charges of cheating and forgery and the government dissolved its board in moves to limit the fallout from India's biggest corporate scandal in memory.
Chairman Ramalinga Raju, who resigned Wednesday after revealing years of accounting fraud which analysts said cast doubt over the future of the outsourcing company, was also expected to appear before the market regulator Saturday.
Satyam shares slumped to 11.50 rupees (24 U.S. cents), their lowest since March 1998 and far below 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 just six months ago.
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 record and forgery," S.S.P. Yadav, police chief of the southern Andhra Pradesh state, whose capital Hyderabad is home to Satyam, told Reuters.
Earlier, 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. He said there was no move to take over Satyam's management for now.
"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.
A Satyam spokeswoman said the company had no comment on the arrests.
In a bid to ease investor worries, the Securities and Exchange Board of India said auditors' certification of Satyam results from the December quarter would be peer reviewed.
The government barred Satyam's board from holding its scheduled meeting Saturday, which was called to consider likely options such as inviting a takeover or strategic investor and appointing an investment banker.
FICTITIOUS CASH
Satyam's chief financial officer has also offered to resign after Raju disclosed that profit was 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."
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 pick up clients.
Satyam will be cut from India's benchmark stock index, the Bombay Stock Exchange's 30-share Sensex, from Monday.
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 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, Australia's top lender, said it was reviewing a contract with Satyam for system development and support to 2011.
The chairman of Larsen & Toubro, India's top engineering and construction firm, 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.
Several securities fraud class action lawsuits have already 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)
(Additional reporting by Janaki Krishnan in MUMBAI, Miranda Maxwell in MELBOURNE and Rajkumar Ray in NEW DELHI)
(Editing by David Cowell)
