NOw the Indian government steps in

The State Steps Into Satyam

Naazneen Karmali, 01.09.09, 03:55 PM EST

India's government takes over the tarnished tech outsourcer and arrests its former chairman.

Satyam Computer Services Ltd.

01/08/2009 4:00PM ET

India's government took control of Satyam Computer Services on Friday, and it also took custody of the technology outsourcer's book-cooking former chairman.

Late Friday, Ramalinga Raju, who stepped down Wednesday amid a financial scandal, surrendered to police in Andhra Pradesh, his home state. His brother B. Rama Raju who was managing director also turned himself in.

The arrests came shortly after the Indian government announced that it was taking charge of the scandal-rocked firm, mauled by a fraud exceeding $1.0 billion. Prem Chand Gupta, minister of corporate affairs, announced that the government will nominate 10 new directors to Satyam’s board to oversee the company.

In effect, Satyam Computer Services’ (nyse: SAY - news - people )'s truncated three-member board, which was to meet Saturday, has been disbanded. (See "Satyam Wants To Stay.") Erstwhile director Ram Mynampati had been acting as Satyam’s interim chief executive, an appointment that was ironically, blessed by the outgoing chairman and chief architect of the scam. The new board is to meet at the end of next week.

The government had exercised its powers under Section 408 of The Companies Act, 1956 which entitles it to replace a company board with a view to safeguarding the interests of shareholders or the public at large. (See "India's Enron.")

"This was the right thing to do. Today Satyam’s board is tainted and must be removed," said lawyer Ravi Kulkarni, senior partner at Khaitan, a law firm in Mumbai. "This move will restore the confidence of all stakeholders," he added.

In Mumbai trading on Friday, Satyam’s shares plunged 40.3%, or 16.10 rupees (34 cents), to a record low 23.85 rupees (50 cents). The benchmark Sensex stock index fell by 180.41 points or 1.9%, to 9406.47, as investor sentiment turned jittery over the quality of overall corporate governance standards amongst Indian companies.