Italian defence giant Finmeccanica's troubles in India are deepening, with the government seeking repayments worth some 270 million euros ($367.38 million) over a scrapped helicopter deal.
The government's demand threatens to complicate efforts by AgustaWestland, a division of cash-strapped Finmeccanica, to mend 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 it termed a breach of integrity relating to alleged corruption.
New Delhi, however, agreed to AgustaWestland's calls for arbitration. It will use this process as part of its push to get back the amount it has already paid, defence ministry officials told Reuters.
AgustaWestland has received just over 43 percent of the deal's value, a sum that the Anglo-Italian firm matched with bank guarantees to be reclaimed after the helicopters were delivered, said the defence officials, who asked not be identified.
The company also put up a separate small deposit worth 5 percent of the contract, bringing the total value of the guarantees to around 270 million euros.
"The government now wants to get back all our money by invoking the bank guarantee," said one defence ministry official who declined to be named. "This has to be returned."
State-controlled Finmeccanica did not respond to requests for comment. It is not clear in which country or at which banks the guarantees, which can be in the form of cash deposits or bonds, are held.
New Delhi froze payments for the helicopters last February after Italian police arrested Giuseppe Orsi, Finmeccanica's then chairman and chief executive, for allegedly paying bribes to middlemen to secure the deal.
Orsi denies the charges and his trial is ongoing at a court near Milan.
India's Central Bureau of Investigation also launched an official probe into the deal last year.
Graft an Election Issue
India's coalition government, led by the Congress party, is keen to be seen as tough on graft in the lead up to parliamentary elections due by May 2014. Congress performed poorly in state polls last year due to rising public anger over a string of corruption scandals.
Yet both sides are treading cautiously. India is wary of scaring off foreign defence contractors while Finmeccanica wants to stay in the hunt for future defence deals.
The government is wary of spooking defence companies as it seeks to spend $100 billion over a decade to upgrade its military, often through partnerships between foreign and local companies to help India build a homegrown industry.
The three-person arbitration tribunal will consist of one person chosen by each side and one mutually-agreed neutral member. It will take place in India, giving what lawyers say is a home advantage to the government, although there are examples of New Delhi losing cases.
The tribunal has the power to reinstate the deal but it is unlikely 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 could take months or even years.
One issue that will complicate India's claim to the cash is that three of the 12 helicopters have already been delivered. The air force is yet to decide whether or not it wishes to keep the choppers, defence ministry officials said.
The AW101 helicopters were intended for an elite squadron of the Indian Air Force which ferries around the president, the prime minister and other top-level VIPs.
Reputation at Stake
AgustaWestland has called for arbitration in the hope of totally reversing the decision to scrap the deal, arguing that the corruption allegations are yet to be proved.
"Terminating the contract now is at best premature, plus there is an issue of reputation here that could have an effect on the company globally," said a source close to AgustaWestland.
For the Italian company, the arbitration is about salvaging its reputation and avoiding being blacklisted in not just India's but Asia's growing market.
Finmeccanica made a net loss of 136 million euros in the first nine months of 2013, putting pressure on the company to show that the graft allegations are not costing it business.
Defence Ministry officials insist Finmeccanica will not be blacklisted, conceding competition for some important deals has been hurt by barring several groups in recent years.
Corruption and cancelled deals have set back purchases since the mid-1980s. India is buying everything from submarines to fighter jets in a much-needed push to update its armed forces.
"India has many things going with Finmeccanica so you want to make sure that you reach an agreement that does not close any doors," said Uday Bhaskar, a defence analyst at the Society for Policy Studies in New Delhi.
The company is competing for the contract to supply 56 helicopters to the Indian navy. New Delhi has not voiced any concerns over the quality of AgustaWestland's choppers.
Past cases show that India's government rarely agrees to settle quickly. Arbitration takes at least one year and often incurs high costs, making it an unappealing route, lawyers say.
Vodafone issued a notice threatening international arbitration against India in 2012 but has since agreed to talks over its tax dispute.
Arbitration cases pitting companies against the government are rare and the results are mixed. Australian manufacturing group White Industries pursued and won damages worth millions of dollars in 2011 over court delays in handling the company's dispute with Coal India over a mining equipment deal.
Both Vodafone's threatened case and White Industries' case draw on bilateral investment treaties between India and countries where the companies are based, rather than contracts between each company and the government.
"Sometimes you don't want to present yourself as weak," said Sherina Petit, a dispute resolution lawyer and India specialist at global law firm Norton Rose Fulbright, referring to the government's habit of standing its ground.
"You don't want companies to think that they can file an arbitration and come away with a big lump sum."