The defence ministry said on Monday it had ordered a bribery investigation over state-run Hindustan Aeronautics Limited's (HAL) purchase of jet engines from Britain's Rolls-Royce Holdings(RR.L) in a deal worth at least $1.2 billion.
The Central Bureau of Investigation, the country's top crime-fighting agency, will look into more than 5 billion rupees in alleged kickbacks in the deal that was signed in 2011, a ministry official told Reuters.
No comment was immediately available from Rolls-Royce's office in India.
Suspicions of corruption in India's defence procurement programme have for years delayed the modernisation of the armed forces of the world's most populous nation that continue to rely heavily on outdated Soviet-designed equipment.
The air force has been dogged by a series of crashes of its Russian-built MiG fighter jets, while an accident aboard a Soviet-made submarine that killed two officers last week led the navy's chief of staff to resign.
The Congress party-led government is keen to be seen as tough on graft before parliamentary elections due by May. The party, lagging in the polls, has faced rising public anger over a string of corruption scandals in its current term.
The probe into the HAL deal follows the arrest in Britain last month of Indian-born businessman Sudhir Choudhrie and his son in a bribery investigation by the Serious Fraud Office into Rolls-Royce's dealings in China and Indonesia.
Both men denied any wrongdoing and have been released on bail, their spokesman said last month.
While there was no indication that the latest probe was linked to the Choudhries, newspapers reported that HAL's "vigilance wing" had raised the alarm after hearing allegations that Rolls-Royce had hired consultants to advise on the deal.
Such lobbyists are explicitly banned under India's defence procurement system.
The Rolls-Royce aero engines were being procured to power Hawk advanced jet trainers, used to prepare Indian defense force pilots to fly next-generation fighter jets.
India had ordered a total of 123 twin-seater Hawks from BAE Systems (BAES.L) so far, with 24 to be supplied directly and the rest made under licence by HAL, according to the British defence and aerospace group.
The probe deals another blow to Rolls-Royce, the world's second largest maker of aircraft engines behind General Electric (GE.N), which said in February that U.S. and European defence cuts mean that a decade of profit growth will come to an end this year.
Rolls-Royce has since outlined plans designed to maintain its long-term dominance in large aircraft engines, showcasing two new models that could improve efficiency by up to 10 per cent.