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By Shyamantha Asokan
NEW DELHI, Jan 10 (Reuters) - Italian defence giantFinmeccanica's troubles in India are deepening, withthe New Delhi government seeking repayments worth some 270million euros ($367.38 million) over a scrapped helicopter deal.
The government's demand threatens to complicate efforts byAgustaWestland, a division of cash-strapped Finmeccanica, tomend fences with India, the world's biggest arms buyer.
India last week cancelled a 560-million-euro ($770 million)deal with AgustaWestland for 12 AW101 helicopters over what ittermed a breach of integrity relating to alleged corruption.
New Delhi, however, agreed to AgustaWestland's calls forarbitration. It will use this process as part of its push to getback the amount it has already paid, defence ministry officialstold Reuters.
AgustaWestland has received just over 43 percent of thedeal's value, a sum that the Anglo-Italian firm matched withbank guarantees to be reclaimed after the helicopters weredelivered, said the defence officials, who asked not beidentified.
The company also put up a separate small deposit worth 5percent of the contract, bringing the total value of theguarantees to around 270 million euros.
"The government now wants to get back all our money byinvoking the bank guarantee," said one defence ministry officialwho declined to be named. "This has to be returned."
State-controlled Finmeccanica did not respond to requestsfor comment. It is not clear in which country or at which banksthe guarantees, which can be in the form of cash deposits orbonds, are held.
New Delhi froze payments for the helicopters last Februaryafter Italian police arrested Giuseppe Orsi, Finmeccanica's thenchairman and chief executive, for allegedly paying bribes tomiddlemen to secure the deal.
Orsi denies the charges and his trial is ongoing at a courtnear Milan.
India's Central Bureau of Investigation also launched anofficial probe into the deal last year.
GRAFT AN ELECTION ISSUE
India's coalition government, led by the Congress party, iskeen to be seen as tough on graft in the lead up toparliamentary elections due by May 2014. Congress performedpoorly in state polls last year due to rising public anger overa string of corruption scandals.
Yet both sides are treading cautiously. India is wary ofscaring off foreign defence contractors while Finmeccanica wantsto stay in the hunt for future defence deals.
The government is wary of spooking defence companies as itseeks to spend $100 billion over a decade to upgrade itsmilitary, often through partnerships between foreign and localcompanies to help India build a homegrown industry.
The three-person arbitration tribunal will consist of oneperson chosen by each side and one mutually-agreed neutralmember. It will take place in India, giving what lawyers say isa home advantage to the government, although there are examplesof New Delhi losing cases.
The tribunal has the power to reinstate the deal but it isunlikely to force New Delhi into a total u-turn, lawyers say.Any decision will be enforced by India's courts.
No date has been set yet for its start, and the case couldtake months or even years.
One issue that will complicate India's claim to the cash isthat three of the 12 helicopters have already been delivered.The air force is yet to decide whether or not it wishes to keepthe choppers, defence ministry officials said.
The AW101 helicopters were intended for an elite squadron ofthe Indian Air Force which ferries around the president, theprime minister and other top-level VIPs.
REPUTATION AT STAKE
AgustaWestland has called for arbitration in the hope oftotally reversing the decision to scrap the deal, arguing thatthe corruption allegations are yet to be proved.
"Terminating the contract now is at best premature, plusthere is an issue of reputation here that could have an effecton the company globally," said a source close to AgustaWestland.
For the Italian company, the arbitration is about salvagingits reputation and avoiding being blacklisted in not justIndia's but Asia's growing market.
Finmeccanica made a net loss of 136 million euros in thefirst nine months of 2013, putting pressure on the company toshow that the graft allegations are not costing it business.
Defence Ministry officials insist Finmeccanica will not beblacklisted, conceding competition for some important deals hasbeen hurt by barring several groups in recent years.
Corruption and cancelled deals have set back purchases sincethe mid-1980s. India is buying everything fromsubmarines to fighter jets in a much-needed push to update itsarmed forces.
"India has many things going with Finmeccanica so you wantto make sure that you reach an agreement that does not close anydoors," said Uday Bhaskar, a defence analyst at the Society forPolicy Studies in New Delhi.
The company is competing for the contract to supply 56helicopters to the Indian navy. New Delhi has not voiced anyconcerns over the quality of AgustaWestland's choppers.
Past cases show that India's government rarely agrees tosettle quickly. Arbitration takes at least one year and oftenincurs high costs, making it an unappealing route, lawyers say.
Vodafone issued a notice threatening internationalarbitration against India in 2012 but has since agreed to talksover its tax dispute.
Arbitration cases pitting companies against the governmentare rare and the results are mixed. Australian manufacturinggroup White Industries pursued and won damages worth millions ofdollars in 2011 over court delays in handling the company'sdispute with Coal India over a mining equipment deal.
Both Vodafone's threatened case and White Industries' casedraw on bilateral investment treaties between India andcountries where the companies are based, rather than contractsbetween each company and the government.
"Sometimes you don't want to present yourself as weak," saidSherina Petit, a dispute resolution lawyer and India specialistat global law firm Norton Rose Fulbright, referring to thegovernment's habit of standing its ground.
"You don't want companies to think that they can file anarbitration and come away with a big lump sum."
