NEW DELHI India is seeking to cancel a $750 million order for a dozen helicopters from Italian defence group Finmeccanica, the defence ministry said on Friday, responding to growing pressure over kickback allegations.
India has frozen payments for the AgustaWestland helicopters pending an inquiry after Italian police earlier this week arrested the head of Finmeccanica, Giuseppe Orsi, in connection with the case.
India has already taken delivery of three of the helicopters.
In recent years, India has emerged as the world's largest weapons importer, but procurements are periodically held up by allegations of corruption. Finmeccanica could be blacklisted in India for at least five years if investigators prove bribery.
IHS Jane's says Finmeccanica has been pursuing opportunities in India valued at more than $12 billion in 2013.
Orsi, who has denied any wrongdoing, resigned on Friday.
"(The Ministry of Defence) today issued a formal show cause notice to AgustaWestland of the UK seeking cancellation of contract," ministry spokesman Sitanshu Kar said.
"The operation of the contract has been put on hold. The company has been asked to reply to the notice in seven days," Kar said in a statement.
Graft is likely to be a major issue in elections due by 2014 and a senior defence ministry official said the government was seeking to scrap the deal to fend off pressure in parliament.
The Italian investigation has been going on for months and India launched its own police inquiry this week after Orsi's arrest. Indian investigators said on Friday they will travel to Italy next week to find out details of the case against Orsi.
Indian officials have complained that the Italian investigators were not sharing any details of the case.
The opposition Bharatiya Janata Party and the media have said the government should have acted sooner on signs that something was amiss, after an internal defence ministry investigation found nothing wrong with the deal.
The issue is expected to dominate the first few days of the budget session in India's parliament when it opens next week.
The image of the Congress party-led government has been tarnished in the last four years by corruption scandals in the sale of mobile phone spectrum, coal fields and contracts for the 2010 Commonwealth Games in Delhi.
India on Friday said it was pressing Britain for information about the case. AgustaWestland is a wholly owned subsidiary of Finmeccanica, but is based in Britain.
British Prime Minister David Cameron arrives in India for a three-day state visit on Monday.
"We've had recent talks with the UK government on this; they've told us they are looking at Italy to first complete their investigations," Syed Akbaruddin, a spokesman for India's foreign ministry, told reporters in New Delhi.
One of the people Italian prosecutors say is involved in the case is British citizen Christian Michel, named in an arrest warrant as receiving bribes on behalf of AgustaWestland.
Orsi, who was questioned by prosecutors on Friday, faces allegations of paying bribes to win the 560 million euro contract for AgustaWestland to supply the helicopters, for use by senior Indian politicians.
Orsi's arrest warrant is based largely on statements made by Guido Ralph Haschke, who says he channelled bribes from Finmeccanica through three brothers related to a former Indian Air Force chief, S.P. Tyagi, to change terms of the tender to favour the AgustaWestland aircraft.
Tyagi denies any wrongdoing.
A chronology of the deal issued by the government this week suggests key decisions regarding the tender requirements were not made by Tyagi and were taken under a previous government.
Orsi told magistrates he had never employed Haschke for any kind of activity in relation to the helicopter tender, Orsi's lawyer, Ennio Amodio, told reporters. He said he had never known the Tyagi family.
Amodio also said Orsi "affirmed that Indian authorities have acted correctly" and that he was sure they never took bribes.
(Writing by Frank Jack Daniel; Reporting by Nigam Prusty; Additional reporting by Emilio Parodi in Busto Arsizio; Editing by Ruth Pitchford)