India probes 21 companies in loans scandal

India's federal investigator said on Friday it was probing 21 companies for possible links  to a bribes-for-loans scandal that has hit bank shares and  hurt the country's image as an investment destination. 

The scandal, in which eight financial executives have so  far been arrested, is one of several to dog the government of  Prime Minister Manmohan Singh, putting to the test the ability  of one of the world's fastest growing emerging economies to  crack down on corruption. 

Shares in banks and real estate companies -- the two  sectors with companies that have so far been implicated in the  graft probe -- fell sharply on Friday as the scandal unfolded,  underperforming a negative Mumbai market. 

Analysts said the scandal, which comes a few days after  Singh had to defend his government in another graft scandal  involving telecoms licences sold too cheaply, could harm  investor sentiment. 

"This is just unfolding at this point in time. These are  very serious issues which impact investor sentiments," said  Nitin Jain, Singapore-based principal of fund manager Kotak  Mahindra. 

"If we can clearly say that we have done something right  at this point in time and do proper things at this point in  time then it's salvageable but otherwise it does have a  potential to impact investor sentiments towards India from a  medium term perspective," Jain said. 

Investors, so far, remain keen to tap into a country with  a young and fast-urbanising population of 1.2 billion. Economic growth is forecast at 8.5 per cent in 2010-11, and  then between 9 and 10 per cent every year after that, levels  rivalled only by China. 

On Friday, a senior official with the federal Central  Bureau of Investigation (CBI) said notices had been sent out  to 21 medium to large companies, including real estate firms  to provide information about their possible link to the scandal. 

Two days earlier, the CBI arrested five officials from  state-run listed lenders, including the chief executive of LIC  Housing Finance , accused of taking bribes to  facilitate large corporate loans. 

Three senior executives from a listed private company were  also arrested on charges of handing out the bribes. 

"Preliminary evidence points to the fact that the case is  limited to individuals. So fallout is unlikely to be big," the  senior CBI official, who did not want to be named, told Reuters. 

The official declined to provide further information, but  since Wednesday, companies from the real estate, financial,  banking and other sectors -- including Suzlon Energy   , Jaiprakash Power and Unitech --  have said they have been contacted by the CBI. All have denied  wrongdoing. 

Media reports said on Thursday the CBI and the Securities  and Exchange Board of India (Sebi) were probing the  possibility some loans were invested in the stock market  rather than the projects they were intended for. 

The Economic Times newspaper said at least nine companies  were being probed for insider trading. 

Shares in companies affected by the probe continued to  fall on Friday, underperforming a slightly negative blue-chip  Mumbai stock index . 

The real estate index slid as the spotlight  fell on the sector, which is borrowing from companies,  including LIC Housing Finance, to raise funds for development  projects. 

Shares in real estate firms have also fallen on fears that  a cash crunch could delay or derail major development projects. 

Finance Minister Pranab Mukherjee has asked all banks,  financial institutions and insurance firms to look into their  exposures to firms named by federal investigators in the case. 

India was ranked 87th in Transparency International's 2010  ranking of nations based on the perceived level of corruption.  India lies behind rival China, which is in 78th place. 

The Indian bond and rupee market remained unaffected by  the corruption scandal as traders did not view it as a risk to  the banking system as a whole and as inflation, interest rates  and fiscal conditions affected these markets more. 

The CBI said those arrested included senior officials at  state-run Central Bank of India , Punjab National Bank   and Bank of India -- all major banks with  operations across the country. 

The CBI said the executives arrested had received bribes  from listed private broker Money Matters Financial Services   , which acted as a "mediator and facilitator" of  corporate loans and other facilities. 

The executives in custody have yet to comment on the  charges and are to remain in custody until Monday. 
 

Follow Emirates 24|7 on Google News.