India's Satyam Hit With Asset Freeze

An Indian court has frozen the bank accounts of Satyam Mahindra, an offshore outsourcer that provides crucial tech services to numerous U.S. businesses and government agencies, following a claim by India's revenue department that the company owes more than $137 million in unpaid taxes.

India's Central Board of Direct Taxes last week rejected Satyam's request for a stay on payment of the back taxes, according to media reports in the country. The court-ordered freeze is in effect until March 31, when another hearing is scheduled.

Word of the asset freeze sparked concerns that Satyam would not be able to meet payroll at the end of the month and could suffer employee attrition, but the company said it has sufficient cash on hand to meet operating expenses.

"You will read further media articles on this issue tomorrow, elaborating on the matter of frozen bank accounts," said Satyam human resources chief Hari Thalapalli, in an e-mail to employees last week, according to The Hindu Business Line.

"While the amount sought to be recovered is about Rs 616 crore ($137.6 million), the balances in our bank accounts are far in excess of the tax demands," said Thalapalli. "Our decision to contest the CBDT order is based on our conviction on this issue. All these will not impair our ability to run the day-to-day operations in any way."

Satyam's tax troubles are part of the fallout from a 2009 scandal that's been dubbed India's Enron. Former Satyam chairman Ramalinga Raju was arrested and jailed after admitting he falsified the company's cash position by as much as $1 billion through the creation of phony invoices and other scams.

A number of U.S. customers, including State Farm Insurance, canceled contracts with Satyam upon learning of the fraud. Following the scandal, Satyam was acquired by telecom outsourcer Tech Mahindra for $422 million.

If Satyam's operations are disrupted by the cash freeze, it could cause big headaches for customers. Among them is the state of Michigan, which in January signed a five-year, $5 million contract with Satyam under which the outsourcer is to build a central data warehouse for the state.

The contract, viewed by InformationWeek, allows Michigan to cancel the deal and take possession of any work in progress if Satyam were to file for bankruptcy or otherwise become insolvent. Satyam remains a defendant in at least 12 shareholder lawsuits still pending before U.S. courts that stem from the financial scandal.