Jan. 12 (Bloomberg) -- Satyam Computer Services Ltd. will have to restate earnings and may be broken up after the company’s founder was arrested in India’s biggest corporate fraud investigation, executives said.

Three new directors led by Housing Development Finance Corp. chairman Deepak Parekh are meeting in Hyderabad today to take over India’s fourth-largest software exporter after the government replaced its board and detained chairman Ramalinga Raju. The new directors will brief reporters at 5 p.m. today.

“First we need to go and assess the magnitude of the issue,” Parekh, 64, said in a telephone interview. “Then we have to work on the re-statement of accounts.”

Satyam climbed by a record in Mumbai trading on speculation that the new government-appointed board will draw up a rescue plan. Splitting Satyam may avoid an exodus of clients and shield potential buyers from lawsuits and regulatory probes.

“The way to salvage the business is to house it in another company and then sell it, there will be takers for it without the liabilities,” said Rajendra Chitale, managing partner at M.P. Chitale & Associates, who worked with Parekh a decade ago on the rescue of India’s biggest mutual fund. “It will be like selling the family jewels and paying off the liabilities.”

Raju’s disclosure that he’d padded accounts for several years came three weeks after he’d failed to push through the sale of family companies to Satyam and the World Bank disclosed an eight-year ban on contracts. Wipro Ltd. shares today slumped after the Washington-based institution said it was also barred 18 months ago, further undermining Indian corporate disclosure practices.

Founder Detained

Raju, Satyam’s 54-year-old founder, his younger brother Rama and Chief Financial Officer Srinivas Vadlamani will seek bail on Jan. 16. They were remanded to judicial custody until Jan. 23.

The brothers were detained on charges including forgery, breach of trust and criminal conspiracy, Inspector General V.S.K. Kaumudi said on Jan. 9. Officials have seized documents and the nation’s accounting body is examining auditor PricewaterhouseCoopers LLC’s local unit, Corporate Affairs Minister Prem Chand Gupta said on Jan. 9.

Raju’s admission that he’d fabricated $1 billion in cash and assets sparked a record plunge in the company’s shares that wiped out $2.2 billion of investor wealth. The stock surged 68 percent to 38.25 rupees, valuing the company at $331 million.

“Though the news of the new board at Satyam is positive, it will be important to track the incremental news flow as they start assessing the state of the company,” said Sandip Sabharwal, chief investment officer at J.M. Financial Mutual Fund, which manages $1.2 billion in equities and bonds in Mumbai.

Wipro Declined

Wipro fell as much as 12 percent, the biggest decline in almost three months. India’s third-largest software exporter was banned in 2007 for offering World Bank employees shares in its 2000 stock offer in the U.S., according to a statement. Megasoft Ltd., parent of Megasoft Consultants Ltd., declined 15 percent after the World Bank slapped a four-year ban on the consulting business.

The 64-year-old Parekh was hired by the government to save Unit Trust of India, then the biggest Indian asset-management company, after its largest investment plan, US-64, threatened to sink the stock market in 1998. Parekh headed a panel including Chitale that drafted a plan to revive the fund. Unit Trust was split in 2003 into performing and non-performing assets.

Parekh, chairman of Housing Development, India’s biggest mortgage lender, said his first task is to restore confidence among Satyam’s clients and 53,000 employees who write software and manage computer networks in offices from the U.S. to Brazil.

Pay Wages

The new board, including Kiran Karnik, ex-president of the nation’s software industry lobby group, and former regulator C. Achuthan, will need to ascertain exactly how much cash Satyam, which means “truth” in Sanskrit, has to pay wages and complete its contracts.

Of Satyam’s reported cash and bank balances of 53.6 billion rupees ($1.11 billion) on Sept. 30, 50.4 billion rupees was non- existent, Raju said on Jan. 7 when he quit the board. Interim chief executive officer Ram Mynampati said the following day he wasn’t sure if Satyam had enough cash to last the month.

“If the company is to be sold as it is, any new owner has to spend a lot of time and energy dealing with the aftermath,” Chitale said. “Unless and until there are brave hearts,” Satyam is unlikely to be taken over in its current form, he said.

Satyam, founded in 1987, made its name by helping companies tackle the year 2000 computer bug. By 2001, the so-called Y2K revenue was substituted by software that helped companies to complete transactions over the Internet.

After the bursting of the dot-com bubble, Raju, who says he’s inspired by physicist Albert Einstein, expanded into software including design engineering programs for General Motors Corp. and medical administration in a venture with General Electric Co.

‘Steady Ship’

IGate Corp., a U.S.-based computer services provider with operations in India, said it may consider merging with Satyam if the new management seeks a strategic partner.

IGate could “help steady the ship,” Chief Executive Officer Phaneesh Murthy said in a telephone interview. “I wouldn’t rule out the concept of a merger if somebody puts forward an interesting enough proposition.”

Satyam was sued by investors in at least three class-action lawsuits in the U.S. following the plunge in its shares.

Satyam shareholder Lazard Asset Management LLC said it asked for information from the government about developments in the investigation. Lazard Asset increased its stake in Satyam on Jan. 7 to 5.3 percent from 4.79 percent.

The fall of Raju, named Ernst & Young Entrepreneur of the Year in 2007, began three weeks ago when Satyam proposed paying $1.6 billion for Maytas Properties Ltd. and Maytas Infra Ltd., both tied to his family. The plan was scrapped 12 hours later after investors called it a “woeful misuse of cash.” Raju said the sale was designed to plug the hole in Satyam’s balance sheet.

“A company without a board is like a headless chicken,” Karnik, former president of the National Association of Software and Service Companies, told Bloomberg before his appointment. “Satyam needs people with credibility, integrity to retain customers and employees. You also need legal protection for those who come on board from future lawsuits.”

To contact the reporters on this story: M.C. Govardhana Rangan in Mumbai at grangan@bloomberg.net; Harichandan Arakali in Hyderabad, India at harakali@bloomberg.net.

Last Updated: January 12, 2009 01:42 EST