The new head of Italian defense group Finmeccanica has inherited a corruption crisis over a $750 million helicopter deal with India that risks hurting the company's business in other foreign markets.
India's defense ministry confirmed on Thursday that it had suspended payments following allegations that Finmeccanica paid bribes to swing the deal for the sale of 12 luxury helicopters.
Finmeccanica promoted company insider Alessandro Pansa to the top job at a hastily convened board meeting on Wednesday night. Police in northern Italy arrested CEO and Chairman Giuseppe Orsi the previous day.
Orsi, who is being held in jail but has not been charged, faces allegations of paying bribes to win a 560-million-euro ($750-million) contract for the company's AgustaWestland unit to supply helicopters for use by senior Indian politicians.
He denies any wrongdoing and will be questioned on Friday.
Finmeccanica shares fell 1.7 percent on Thursday and have lost 12 percent in the aftermath of Orsi's arrest.
Concerns over the potential long-term damage to sales around the world from the taint of corruption claims outweighed relief at swift action to fill the management vacuum.
"The speed at which the company tried to fix the corporate governance issues is a positive," Italian bank Mediobanca said.
"We still see reputational risk and we wonder if some other countries may try to cancel orders," it said.
India, the world's largest weapons importer, has threatened to scrap the deal and blacklist Italy if bribery allegations are proven. It will not take delivery of the remaining nine helicopters until a probe by its Central Bureau of Investigation (CBI) is complete.
(Read More: India, Russia Seal Defense Deals; Hail Partnership)
Finmeccanica unit Alenia Aermacchi is hoping to bid for a contract to supply over 50 military transport aircraft to India in competition with European aerospace group EADS.
In India, where national elections are due next year, the opposition Bharatiya Janata Party (BJP) lambasted the Congress-led government for not acting sooner over the allegations.
An internal defense ministry investigation last year found no foul play in the purchase of the helicopters, destined for use by India's political elite.
Critics say the government did too little to follow up later media disclosures that the Italian investigation linked India's former air chief S.P. "Shashi" Tyagi and three of his cousins to the alleged bribery. Tyagi denies any wrongdoing.
On Thursday, one of the cousins, Sanjeev "July" Tyagi, denied allegations in the Italian arrest warrant that he had taken 100,000 euros in cash bribes and introduced company representatives to the air chief on several occasions to discuss the helicopter deal.
"I have nothing to do with this, they are lying," he told CNN-IBN television, adding he and his brothers were consultants to the power industry. "Never, ever in the defense sector."
Italian State Role
In Italy, elections are only just over a week away and all sides are trying to make political capital from the latest in a series of corruption cases to shake the Italian business world.
(Read More: Monte Paschi Former Finance Chief Held in Italy)
Former Prime Minister Silvio Berlusconi, who has fought a series of legal battles himself over his business empire and private life, has said that overzealous prosecutors risked harming Italian business.
The Italian state remains the largest shareholder in Finmeccanica with a stake of about 30 percent.
Centre-left leader Pier Luigi Bersani, whose group was ahead in the last opinion polls published before the February 24-25 election, said on Thursday it was the wrong moment to consider further privatizations.
"In this moment it would be crazy... I am talking about Eni, Enel, about Finmeccanica," Bersani said when asked about potential privatizations in a television interview, referring to oil giant Eni and utilities group Enel.
Ratings agency Moody's confirmed its rating of Finmeccanica debt after Pansa's appointment but cut the outlook to negative from stable.
"The negative outlook reflects heightened challenges in achieving a stronger operating and financial profile that is consistent with expectations for the Baa3 rating," it said.
Moody's cited a soft outlook for defense spending and the need for Finmeccanica to sell off more assets.
Pansa, who joined the company in 2001 as chief financial officer, will be supported by Guido Venturoni, 78, a former admiral who becomes vice chairman and who was the senior independent director on the Finmeccanica board.
Shareholder meetings will be held in April to finalize the new board which is when a new chairman could be appointed to work alongside Pansa.
The heavily indebted group is trying to sell units including its AnsaldoEnergia power engineering business to focus on its core aerospace and defense activities.