Indian Government Ponders Satyam Bailout in Wake of Raju Scandal

By , Money Morning •

By Jason Simpkins
Managing Editor
Money Morning

Rocked by scandal, Satyam Computer Services Ltd. (ADR: SAY) is embarking on a massive corporate restructuring, but with India's reputation as an investment destination and world leader in information technology at stake, time is of the essence and the government could be forced to step in with a financial bailout.

"We are considering all options and will soon announce definite steps to help the company overcome the current crisis as it is the question of saving jobs and an international brand," Commerce and Industry Minister Kamal Nath said Monday. "The Prime Minister is closely monitoring the developments on Satyam."

Indian authorities last Friday detained former Satyam Chairman B. Ramalinga Raju on charges of forgery, breach of trust and criminal conspiracy after the founder of India's fourth-largest software exporter confessed to falsifying about $1 billion in cash on Satyam's books and exaggerating his company's profit margins.

The subsequent plunge of Satyam stock wiped out more than $2.2 billion of investor wealth, and sparked at least three class-action lawsuits in the United States, Bloomberg News reported. 

However, the scandal also undermined India's reputation for corporate governance and jeopardized the reputation of much of the nation's prominent outsourcing industry, particularly in Satyam's home base of Hyderabad. The government has responded with vigor -dismissing the company's entire board of directors, and replacing it with a new three-man board.

The new, government-appointed board includes Deepak Parekh, chairman of the Housing Development Finance Corp., Kiran Karnik, former president of the National Association of Software Services Companies, and C. Achuthan, formerly of the Securities Exchange Board of India.

Parekh said earlier this week that Satyam has urgent "working capital issues" that need "immediate attention," but noted that company accounts must first be re-audited before any real progress can be made there.

"No one has faith in the numbers being produced so far," Parekh said. "Unless the accounts are restated, the outlook for Satyam can't be the same."

The board has named Deloitte Touche Tohmatsu International and KPMG International as auditors to replace PricewaterhouseCoopers International Ltd. in its first step to restore confidence at the company hit by fraud.

The new board must now hire new executives to fill the posts vacated by Raju and former Satyam Chief Financial Officer Srinivas Vadlamani, who was also arrested.

But it must also keep the company afloat while the delicate transition takes place -even as investor confidence wanes.

Satyam's new board has already asked clients to accelerate payments, but the global financial crisis has left many businesses squeezed for cash and credit lines remain tight. If its situation doesn't rapidly improve, Satyam could be faced with a mass exodus of clients, which would force the company to fold.

That would be a devastating development, for Satyam's 53,000 employees would be lost. Those losses would not be limited to India, either. As many as 30% of Satyam's employees -or about 15,900 people - live and work outside India, The International Herald Tribune reported.

The company's demise would also disrupt such key operations as billing and computer-system maintenance among Satyam's customers, which include some of the largest companies in the world. Most important of all, however, a collapse would undermine India's vast IT sector, a showcase industry for the country with export earnings of more than $40 billion.

"The government cannot allow Satyam to plunge, as it will lead to the loss of jobs, hit foreign investment and the record economic growth," C.L. Bansal, who teaches corporate law at Management Development Institute in Gurgaon, near the capital New Delhi, told Bloomberg. "The efforts at saving Satyam are aimed at actually salvaging the image of corporate India."

With the jobs of 50,000-plus Satyam employees, as well as the health of India's outsourcing industry, hanging in the balance, the government may have to intervene with a monetary bailout.

"The government stands ready to help out," said interim board member Parekh. "But it depends on how big the hole is."

Nath, the commerce and industry minister, said that the government will consider "topping up" the stimulus packages already under way in India.

"There are sectors not doing well and we are addressing those sectors by ensuring liquidity ... perhaps another relief package for them which puts them in a level playing field in the global market," Nath told reporters.

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