New Delhi, February 15
In a move that will be keenly watched by governments and defence equipment makers, New Delhi today took the first step to cancel the Rs 3,500 crore deal for 12 AgustaWestland AW-101 helicopters with Italian aerospace major Finmeccanica.

The Ministry of Defence (MoD) issued a formal show-cause notice to AgustaWestland UK, a subsidiary of Finmeccanica, for cancellation of the contract and taking other action as per the terms of the contract and integrity pact, ministry spokesperson Sitanshu Kar said. “With today’s notice, the operation of the contract has been put on hold. The company has been asked to reply to the notice in seven days,” the statement said.

The notice will over-ride existing action such as initiation of a CBI probe into allegations of bribery on February 12. The cancellation of the contract for the VVIP helicopters will mean India would recover the entire cost and damages from AgustaWestland and could also ban its operations in the country. A final call is yet to be taken on whether the entire Finmeccanica group, with its corporate headquarters in New Delhi’s Nehru Place, is banned or its subsidiary AgustaWestland alone faces the ban.

Under provisions of the contract and the integrity pact, India can cancel the contract and recover the money. AgustaWestland did not declare its agents and is under contract to have not paid any amount to any individual or firm for securing the deal.

The cancellation means the helicopter maker will not be entitled to compensation and will be liable to refund payments made by India in terms of the contract with interest. The MoD will also forfeit the bank guarantee running into millions of euros. So far, the MoD has reportedly paid about Rs 1,000 crore to AgustaWestland.

The CBI today registered a complaint on the basis of a letter and the clippings of Italian and Indian newspapers provided by the Defence Ministry asking the investigating agency to probe the alleged Rs 350 crore kickback paid by an Italian firm to clear the deal. A formal case will be registered once the authenticated documents with translations are made available through the Ministry of External Affairs.

A CBI team is also being sent to Italy where the CEOs of AgustaWestland and its parent company Finmeccanica have been arrested on charges that kickbacks to the tune of around Rs 350 crore were paid to bag the deal for the VVIP helicopters.

A complaint was registered when senior officials of the MoD and the CBI met today. The case has been registered to ascertain if any kickbacks were paid, sources said. A warrant in an Italian Court says bribes were paid to cousins of former IAF Chief SP Tyagi to tweak the specifications of the tender. He has denied the allegations.

Yesterday in Europe, the Finmeccania stock dropped and was being traded at Euro 4.19 against Euro 4.76 three days ago. Being banned in the Indian defence market -- that is looking to spend $100 billion in the next decade -- could hive off a major chunk of present and future business for Finmeccanica while its rivals are expected to gain by its elimination. As per the 2012 yearbook of Swedish think-tank Stockholm International Peace Research Institute (SIPRI), New Delhi is the biggest Arms importer.

This is not the first blacklisting of companies and cancellation of contracts. In March 2012, India had blacklisted four foreign companies and two Indian companies on bribery allegation and got the CBI to register a case. Israel Military Industries Ltd; Singapore Technologies Kinetics Ltd; Rheinmetall Air Defence, Zurich; Corporation Defence, Russia; TS Kisan and Co, New Delhi, and RK Machine Tools, Ludhiana, were banned for 10 years.