Govt extends Satyam probe to linked cos

A journalist walks inside the Satyam Computer Services head office in Hyderabad January 12, 2009.

BANGALORE (Reuters) - Fraud-hit Satyam Computer Services Ltd said on Monday a U.S.-based client had cancelled its contract, and the government widened its probe to two firms linked to Satyam's jailed founder.

The government said the Serious Fraud Office's investigation into India's biggest corporate scandal had been extended to include Maytas Properties Ltd and Maytas Infra Ltd, the two firms Satyam tried to take over in mid-December before hastily backing down in the face of a shareholder revolt.

Corporate Affairs Minister Prem Chand Gupta told reporters investigators had informed the government about an "apparent nexus between the events that have taken place in Satyam and the following companies amongst others -- Maytas Properties Ltd and Maytas Infra Ltd."

Satyam, India's No. 4 software services exporter, was plunged into crisis after founder Ramalinga Raju resigned as chairman earlier this month, revealing profits had been falsified for years and $1 billion of cash on the books did not exist.

In his Jan. 7 resignation letter, Raju said the deal to buy the Maytas firms was his last attempt to resolve the problem of fictitious assets on the Satyam balance sheet. Maytas is Satyam spelt backwards.

Maytas Infra Ltd, a construction company in which Raju and his family hold a 36 percent stake, said on Monday its chief executive had resigned in letter sent on Jan. 14.

CUSTOMER CANCELS

Satyam, which specializes in business software, said earlier on Monday that a U.S.-based client, State Farm Insurance Co, had cancelled its contract,

"While we are disappointed in State Farm's decision to discontinue services, our executives are reaching out to clients around the world, and at this point, well over 90 percent of our clients have committed to continuing with Satyam," the company's spokeswoman said. She declined to give details of the contract.

A tech sector analyst with a Mumbai brokerage firm said State Farm was one of the top 10 clients for Satyam, who together accounted for a third of the outsourcing firm's revenue in the July-September quarter last year.

The analyst, who asked not to be named as he was not allowed to speak to the media, said he was briefed about Satyam's top clients and their revenue contribution a few months back by the company's management.

Shares in Satyam, which have tumbled about 85 percent since the scandal broke, ended up 4.1 percent at 25.45 rupees in a Mumbai market that edged up 0.1 percent.

Other clients might also cancel orders, wary of business risks in Satyam, analysts said.

"Any customer dealing with Satyam at this point in time will be concerned with what is happening at the company now," said R.K. Gupta, managing director at Taurus Asset Management.

A government-appointed board at Satyam said on Saturday it was talking to banks about funding, saying all efforts were being made to ensure staff salaries were paid on time.

The board, which also discussed scheduling of vendor payments, said it had received expressions of support from clients. It said it was still looking for a new chief executive and chief financial officer for the outsourcing firm.

The Economic Times newspaper said the new board was looking to appoint up to three investment banks to explore the possibility of finding a buyer.

But analysts said that would be difficult until the extent of the fraud was detected and measures to streamline operations were taken.

"A buyer will have to take the responsibility for the company, and I don't think any one will take a shot in the dark before the accounts are restated and the legal issues are resolved," said Kevin Trindade, an analyst with KR Choksey Shares and Securities.

The former chairman, managing director and chief financial officer of Satyam were moved to police custody on Sunday for four days after spending a week in jail. Under custody, the accused are held in a police lock-up to help investigators.

Raju's lawyer Bharat Kumar told Reuters the three were likely to be in police custody until Thursday morning, adding an application against them being held in jail had been deferred to Thursday. He did not give any reason for the postponement from Monday.

(Additional reporting by Ami Shah and Janaki Krishnan in Mumbai and Rajesh Kumar Singh in New Delhi)