India Scraps AgustaWestland Chopper Contract on Graft Probe

Jan 02, 2014 12:14 am ET

(Updates with analyst quote in seventh paragraph.)

Jan. 2 (Bloomberg) -- India scrapped a $753 million deal to buy helicopters from Anglo-Italian company AgustaWestland following a 15-month corruption investigation and said it’s preparing for an arbitration fight it is seeking to avoid.

The 2010 deal for 12 helicopters from the unit of Italy’s defense and aerospace manufacturer Finmeccanica SpA has been terminated “with immediate effect” because of “breach of the pre-contract integrity pact (PCIP) and the agreement,” the Defense Ministry said in a statement in New Delhi yesterday. A former Indian air force chief and about 10 other officials are under investigation over the sale.

Finmeccanica had received notification of a probe in September 2012, and in February India suspended further payments while issuing a so-called show-cause notice seeking AgustaWestland’s defense against bribery allegations. That followed the arrest the same month of a senior Finmeccanica official in Italy on accusations of corruption and tax fraud.

India’s arms-buying has been affected by officials’ sensitivities over corruption scandals in previous purchases, including one that helped drive the ruling Congress Party to defeat in 1989 elections. The nation is the world’s biggest arms importer, according to the Stockholm International Peace Research Institute.

AgustaWestland, which has already delivered three helicopters to the South Asian nation, denied any violation of the contract. The company hasn’t received any communication from India, it said in a statement yesterday, and reiterated its denial of allegations of wrongdoing.

Arbitration

The Defense Ministry said yesterday that it doesn’t view integrity-related issues as subject to arbitration. At the same time, it nominated an arbitrator because AgustaWestland has appointed one already and has pressed for arbitration, according to the statement.

“Even though India has terminated the deal, that doesn’t mean they’re not bound by the contract, which calls for arbitration,” said S. Chandrasekharan, a retired bureaucrat and director of the South Asia Analysis Group based in New Delhi’s outskirts. “Ultimately, it has to occur. But the real problem here is that corruption is delaying procurement of defense equipment needed to ensure national security.”

India’s federal bureau of investigators has named former air force chief S.P. Tyagi and 10 other people who may have benefited from the helicopter sale. Four companies were also mentioned for allegedly receiving kickbacks in the deal. Tyagi has denied any wrongdoing.

Prime Minister Manmohan Singh’s government has been assailed by graft scandals recently. The national auditor has accused the administration of costing the exchequer as much as $53 billion by favoring certain companies in the awarding of mobile-phone licenses, and handing out coal-mining permits without auctioning them.

--With assistance from Kartikay Mehrotra in New Delhi. Editors: Sunil Jagtiani, Daniel Ten Kate