Satyam Chief Financial Officer Arrested in Fraud Scandal

Indian police arrested the chief financial officer of embattled outsourcing giant Satyam Computer Services Ltd. on Saturday, the third executive to be charged in a massive fraud scandal that threatens to roil India's flourishing tech industry.

The arrest of Vadlamani Srinivas came as authorities tried to contain the $1 billion fraud scandal by dissolving the company's board, including the interim head, and announcing plans to name 10 new replacements.

The scandal broke Wednesday when Satyam's founder and former chairman, B. Ramalinga Raju, confessed to filling the company's balance sheets with "fictitious" assets and "nonexistent" cash in an extraordinary letter to the company's board.

The company — which is now fighting for its life — could no longer conceal the $1 billion hole after a deal intended to save the struggling company was abandoned, Raju said in the letter.

He resigned from Satyam — Sanskrit for "truth" — that day, along with his brother, former managing director B. Rama Raju. The siblings have been arrested and were charged Saturday with criminal conspiracy, forgery, criminal breach of trust and falsifying documents, said senior police official V.S.K. Kumudi. They face up to life in prison, he said.

Srinivas, the third-ranking executive at Satyam, was arrested and charged with the same offenses Saturday night, Kumudi said.

Satyam, which is headquartered in the southern Andhra Pradesh state, 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. The company's clients include a slew of Fortune 500 companies including Nestle, General Electric and Ford Motors.

Corporate Affairs Minister Prem Chand Gupta dismissed Satyam's board late Friday night and in an official statement condemned "the greed and misdeeds of a few persons who were at the helm of affairs of the company."

The statement said the central government will appoint 10 people "to function as directors of the company," but no one had been named to the seats.

Although Satyam is a publicly traded company, the government is able to intervene in extraordinary circumstances to stabilize the company.

Gupta told reporters the new board would hold its first meeting in one week and will appoint a new management team.

Archana Uttapa, a Satyam spokeswoman, said the company did not know who would be named to the new board. A board meeting previously scheduled for Saturday was canceled, she said.

Uttapa said the "business side continues," with work scheduled to return to normal on Monday. She denied Indian media reports that the company was considering firing 10,000 employees.

While media have speculated about mass layoffs and whether the company can meet its payroll, Uttapa said employee salaries have been paid through December and cleared for January. She declined to comment further.

Gupta expressed concern that the scandal would bleed beyond Satyam's offices and into the rest of the outsourcing industry, which has been a catalyst of India's economic growth in recent years.

"The Satyam case is an aberration," he said. "The credibility of the Indian corporate sector in general, and IT sector in particular, should not be allowed to suffer because of this."

The president of the Confederation of Indian Industry said the Satyam scandal — already being called "India's Enron" — could have a ripple effect far beyond the company's employees.

K.V. Kamath said hundreds of thousands of workers outside Satyam could also be affected by the scandal, according to the Press Trust of India news agency, although he did not explain how.

A judge on Saturday ordered Raju and his brother to be held in judicial custody until Jan. 23 while the investigation continues, said Raju's lawyer, S. Bharat Kumar.

Police questioned the brothers throughout Friday night but Raju, who has diabetes and hypertension, saw a doctor at 3 a.m. for complaints of discomfort and chest pain, said Kumar.

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

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.

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 at least 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, said the statements on their Web sites.

Five more lawsuits were reportedly filed in the United States by Glancy Binkow and Goldberg LLP, Harwood Feffer LLP, Federman and Sherwood LLP, Finkelstein Thompson LLP, and Brodsky and Smith LLP, according to Mint, an Indian business newspaper.