By Manoj Kumar
NEW DELHI (Reuters) - India will cancel a $750 million deal to buy helicopters from Finmeccanica SpA and blacklist the Italian defense group if bribery allegations are proven, India's defense minister said, as political opponents tried to capitalize on the scandal.
Italian police arrested Finmeccanica's <SIFI.MI> chief executive Giuseppe Orsi on Tuesday for alleged bribes paid to secure the sale of 12 AgustaWestland executive helicopters to the Indian Air Force, when he was head of the Finmeccanica helicopter unit. Orsi's lawyer denied the allegations.
The former head of India's Air Force, S.P. "Shashi" Tyagi, and three of his cousins are among the Indians named in the arrest warrant for Orsi. All say they are innocent.
Defence Minister A. K. Antony said he had ordered India's Central Bureau of Investigation (CBI) to investigate the purchase of the luxury helicopters destined for use by India's political leadership. He said that if the allegations are proven to be true, the company would be blacklisted and those involved punished.
"If any individual or foreigner, any firm are involved in this malpractice, nobody will be spared. We will take action against them, whatever may be the consequences," he told reporters on Wednesday. Three helicopters have already been delivered.
Coming at a time of cuts in defence procurement spending, the latest scandal could lead to additional scrutiny and delays for defence deals in the works.
"I am sure that there will be initial setback, but we will overcome that. That is not the main thing. The main thing is that we cannot allow corruption in defence deals," Antony said when asked about the impact on weapons modernization.
The arrests in Italy came as Finmeccanica unit Alenia Aermacchi was preparing to compete for a contract to supply over 50 military transport aircraft to India in competition with European aerospace group EADS <EAD.PA>.
The military arm of EADS subsidiary Airbus told Reuters last week it would offer its C295 military transport plane, adding that manufacturers were waiting for a formal competition document from the Indian government.
India, the world's largest weapons importer, has a long history of corruption in defence deals. A multi-million dollar scandal in the 1980s over the purchase of Swedish Bofors artillery guns contributed to an electoral defeat for then-Prime Minister Rajiv Gandhi, of the Congress party.
The current Congress party-led government has been buffeted by a series of corruption scandals that opposition parties plan to exploit ahead of general elections due in 2014.
India's defence ministry has put in place strict guidelines for arms deals in an effort to crack down on bribery and corruption. Last year, six arms firms including Rheinmetall Air Defence, part of Rheinmetall AG <RHMG.DE>, a German automotive parts and defence group, were placed on a blacklist of firms banned from doing business in India. Rheinmettal strongly denied the allegations against it.
The opposition Bharatiya Janata Party accused Antony of dragging his feet in the latest instance and said the case was similar to the Bofors scandal, which implicated an Italian middleman close to the Gandhis. The BJP often seeks to play up the Italian origins of current Congress party leader Sonia Gandhi, Rajiv's widow.
"I see the making of another Bofors in this," BJP spokesman Ravi Shankar Prasad said. He asked why the government had not launched a police investigation earlier despite the details of the Italian prosecution case, including suspects' names, being published in media reports months ago.
"The suspicious circumstances surrounding this raises one fundamental question again - the fact that it was an Italian company, was it the grounds to go slow?"
The Indian Express newspaper had access to Italian prosecution documents last October and ran a series of stories giving detailed accounts of the alleged bribery and named several Indians said to have been involved.
The minister formally ordered the CBI to investigate the deal after Orsi's arrest on Tuesday. It was not clear why the agency had not been asked to investigate before, but Antony criticized Italy on Wednesday for not responding to requests for information about the allegations uncovered by Italian investigators.
"From day one, we have been trying to find out the truth and we conveyed that to them," he said. "So far we have not received any details."
Antony said that so far internal enquiries by the defence ministry have found no evidence against Finmeccanica in the deal. He refused to answer specific questions about the Italian allegations and said the CBI investigation would find the truth.
FORMER AIR FORCE CHIEF
The Italian arrest warrant for Orsi said three brothers who are cousins of Shashi Tyagi received kickbacks and helped twist rules in favor of AgustaWestland in the helicopter tender.
Tyagi denied all wrongdoing and described the charges as "bunkum." Speaking at his home near Delhi, he said that a requirement that the aircraft fly at 18,000 feet had been lowered to 15,000 ft, but during a government led by the opposition BJP and before his time as air chief.
He said the change was necessary because only one helicopter was able to fly that high. Tyagi admitted to having met an Italian called Carlo Gerosa who Italian authorities accuse - along with his U.S.-born partner Guido Ralph Haschk - of working as a middleman for Finmeccanica.
Tyagi, who spoke openly and extensively with media on Wednesday about the case, said he had met Gerosa at least twice, once 15 years ago and once since his retirement, but not while he ran the air force.
Gerosa and Haschk are directors of an India-based IT company called Aeromatrix, the company told Reuters. Tyagi said his cousins had links to Gerosa, but he knew nothing of any defence dealings. Tyagi said he had no knowledge of Gerosa's links to Finmeccanica.
He said the deal had been sealed three years after he retired from the air force in 2007 and denied the changes to the tender requirements had happened during his time in the job.
Antony said he could not comment on the alleged involvement of Tyagi, who still headed the air force when Antony took over the ministry in 2006.
"I have no information within my hands ... nothing is available with me. How can I say anything? At the moment, I will not say anything against any individual unless I get some reports from CBI," he said.
(Additional reporting by A. Ananthalakshmi, Ross Colvin, Satarupa Bhattacharjya and Annie Banerji; Writing by Frank Jack Daniel; Editing by Ken Wills)
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