India arrests first company executive in graft scandal

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Indian police have made the first arrest of a company executive in a multi-billion dollar telecoms corruption scandal that has rocked the Congress party-led government and undermined Prime Minister Manmohan Singh.

Parliament's last session was halted by opposition protests demanding a probe into the scandal. The government has refused a parliamentary investigation, but there have been recent signs it may cave in, worried more chaos could make the passage of the key February 28 budget difficult, and seriously harm its image ahead of state elections this year.

Shahid Balwa, vice chairman of a joint venture with Abu Dhabi's Etisalat, was arrested overnight on allegations two Indian telecoms firms got favorable treatment when licenses were awarded in 2008 in the world's fastest growing mobile market.

One of those companies was Swan, which has since been renamed Etisalat DB and is about 45 percent owned by Etisalat.

Police suspect government officials colluded with the private sector in selling them lucrative 2G mobile licenses below market value and are now probing whether anyone received kickbacks.

The growing scandal has not yet threatened the survival of the coalition government because it holds enough seats in parliament, but a wrong move by the prime minister could hurt the ruling Congress party's chances in forthcoming elections.

The case is India's biggest graft scandal since 1989, when the Congress party lost a general election due to the Bofors scandal over gun contracts involving close associates of then Prime Minister Rajiv Gandhi who were accused of taking bribes.

The stakes in the 2G scandal , which may have cost the country up to $39 billion in lost revenue, are higher though. Since Bofors, India has grown into a global power and a key destination for global investors in emerging markets.

Its mobile market is a huge. India has around 730 million subscribers, roughly equivalent to Europe's population and is adding 17-18 million subscribers a month.

Whether through corruption or incompetence, the Congress party's second term has been plagued with scandals. The ruling coalition may be weakened if there is a backlash in state elections this year, killing hopes it can push through reforms such as allowing foreign investment in the multi-brand retail and the financial sector.

A poor showing in the election could also prompt the government to shift toward more populist measures, and the coalition may be weakened before a 2014 general election as regional allies jump ship.

In another controversy this week, auditors are probing the allocation of satellite communication bandwidth to a firm by the space agency. The government has moved to cancel what it says was a flawed 2005 contract that undervalued the spectrum.

Opposition claims that potential income of $44.1 billion could have been lost may fail to gather momentum due to the case's complexity and the fact the satellites have not even been launched. But once again, Singh has been accused by the opposition of negligence.

"These decisions have been taken by technocrats, possibly without commercial savvy," said Mahesh Uppal, director of telecoms consulting firm Com First. "The government may have erred in its process."

Scandal after scandal

The 2G scandal has already led to the arrest of the former telecoms minister. The opposition, led by the Hindu nationalist Bharatiya Janata Party, is going after the prime minister, accusing him of allowing graft to go unchallenged.

"The same story of Rajiv Gandhi's election loss after Bofors is in danger of being repeated," said Paranjoy Guha Thakurta, a political analyst in New Delhi.

"The fact that the government has apparently softened its position on a JPC (parliamentary probe), the admittance of a mistake from the ISRO (space agency) and the arrest of this executive all indicate that the government wants to change the perception that it is soft on corruption."

The executive arrested in Mumbai was managing director of DB Realty and vice chairman of Etisalat DB, an Indian telecoms joint venture with DB Group, which controls DB Realty.

Police have named property firm Unitech, whose Unitech Wireless joint venture is majority held by Norway's Telenor, as another company suspected in the probe.

Shares in DB Realty dropped about 20 percent in early trade after reports of the arrest. Shares in Unitech, India's second-largest listed realty company, fell more than 8 percent in early trade on Wednesday before paring losses.

Etisalat said on Wednesday it had no involvement in any corruption. DB Realty said the executive was "wrongly implicated" and that no one in the firm had done anything illegal.

Unitech last week denied it had received any favors and said it had complied with rules.

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