India's defense ministry on Monday ordered a probe into charges of bribery in Rolls-Royce’s (OTCMKTS:RYCEY) $1.2 billion defense deal with a state-run company for its jet engines.
The deal, which was signed in 2011 between the British luxury automaker, which also makes airplane engines, and state-run Hindustan Aeronautics Limited, or HAL, will be investigated by the Central Bureau of Investigation, media reports said, adding that the country's defense minister ordered the CBI probe after references to the presence of illegal middle men were made in a letter to HAL. The Rolls-Royce aero engines were being bought to power Hawk advanced jet trainers, or AJTs, which have been a subject of controversy ever since India began using them in 2004.
"The letter was received by HAL, which initiated an inquiry into the entire issue after the board discussed the matter. The defense PSU's chief vigilance officer, Anurag Sahai, an Indian Revenue Service officer, on investigation found the allegations had some prima facie credence about violations of contractual provisions and obligations. The matter was then forwarded to Ministry of Defense for further action," the Times of India, or ToI reported, citing a source.
India has ordered 143 Hawk AJTs, powered with Rolls Royce’s Adour Mk.871 engines, out of which 24 were supplied directly by BAE Systems (OTCMKTS:BAESY) and the rest were made under license by HAL. The procurement, which has been made in several installments since 2004, has raised the question of why a bulk order that would have helped the government buy the engines at a lower price was not preferred, according to ToI.
India’s defense procurement program, which is hobbled by bureaucracy, red tape and corruption issues, has reportedly forced the acquisition of substandard equipment from Russia. And, over the years, India's armed forces have seen its Russian-built MiG fighter jets crash with alarming frequency along with a rise in accidents in submarines, also built by Russia, the latest of which killed two officers last week and led to the resignation of the country’s navy chief Admiral D.K Joshi.
According to ToI, India’s defense minister A.K. Antony ordered the probe into the Rolls-Royce deal after references to hiring middle men appeared in a letter to HAL, a method which is strictly banned in the country.
Indian-born businessman Sudhir Choudhrie and his son Bhanu -- who are suspected of having acted as middle men in the defense procurement process -- were arrested in London last month on charges of bribery by the Serious Fraud Office for helping Rolls-Royce's dealings in China and Indonesia. Although both men have been under scrutiny from Indian regulators for a long time, both have denied any wrongdoing.
London-based Rolls-Royce had said in February that defense cuts in the U.S. and Europe would put an end to a decade of growth in profits for the company.