A Royal Navy AW101 "Merlin" helicopter

Bribery-tainted helicopter deal cancelled by India

India has officially cancelled its corruption-plagued £470m helicopter deal with Italian defence group Finmeccanica's AgustaWestland.

India froze payments for the 12 AW101 helicopters, also known as Merlins in the UK, after Finmeccanica's then chief executive Giuseppe Orsi was arrested in February for allegedly paying bribes to secure the deal, embarrassing the New Delhi government before parliamentary elections due by May 2014.

India's defence minister A K Anthony, who had a meeting with Indian Prime Minister Manmohan Singh hours before the latest decisions were announced, has said he did not believe AgustaWestland's denial that it paid bribes to swing the deal.

"The Government of India has terminated with immediate effect the agreement that was signed with M/S. AugustaWestland International Ltd (AWIL) on 08 February, 2010 for the supply of 12 VVIP/VIP helicopters on grounds of breach of the Pre-contract Integrity Pact and the agreement by AWIL," the Defence Ministry said in a statement yesterday.

India has agreed to take part in an arbitration process, which would be conducted in India under the Indian Arbitration and Conciliation Act of 1996, and Finmeccanica spokesman Roberto Alatri said the company would defend its position.

"We'll do everything that would be necessary to defend the correctness of our position," Alatri told Reuters. "We're sure our behaviour was ethically correct."

He said India's agreement to arbitration was a positive step.

India's Defence Ministry said it believed "integrity-related issues are not subject to arbitration" but nominated an arbitrator, it said, to safeguard its interests.

Uday Bhaskar, a defence analyst at the Society for Policy Studies in New Delhi, said India's participation in the arbitration did not represent a climb-down.

"Cancelling deals and saying that we will not acquire critically-needed equipment, to my mind, is not the answer," Bhaskar said. "But there's no climb-down on this arbitration and as a matter of fact it might be the most viable via media (middle road)."

Indian defence deals have been hit by a number of corruption allegations over the past two decades but a Defence Ministry spokesman said this was the first cancellation of a major deal.

Paying or accepting bribes is prohibited by India's defence procurement rules. The government can cancel a contract if an integrity pact in the rules is violated, and the seller has to forfeit any security money it deposited as a bidder.

India's federal auditor said in August the ministry had initially stipulated that the helicopters should be able to fly to an altitude of 6,000m, which meant that AgustaWestland could not compete since the AW101 was certified to fly only to 4,572m.

India took delivery of three of the helicopters before the deal stalled but the Defence Ministry spokesman said the fate of those aircraft was "uncertain".

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