Giuseppe Orsi, who was heading AgustaWestland when the deal was signed in 2010 and is currently the CEO of the main Finmeccanica group has been placed under house arrest for his role in the alleged EURO 51 million pay off to swing the deal for 12 AW 101 choppers.
The Indian Express had carried a series of stories detailing the nexus between middlemen, executives and officials that has come under probe.
The arrest is a major blow for Finmeccanica that has been making repeated statements denying that any payments were made. Hours after the arrest, the company said that its “operating activities and ongoing projects will continue as usual”.
“In addition, Finmeccanica expresses support for its Chairman and CEO, with the hope that clarity is established quickly, whilst reaffirming its confidence in the Judges,” the company statement read.
While there has not yet been any reaction from the Indian defence ministry, sources said the arrest will mount pressure for a formal probe. India's position till now has been that a formal probe cannot be started unless Italy shares official documents related to the corruption allegations.
IAF officials said that out of the 12 VVIP choppers, three have already arrived in India and are undergoing flight tests. Three more are expected by the middle of this year, followed by the remaining six.
Three other people have been placed under house arrest as part of the probe, including the Chief Executive of Finmeccanica helicopter unit AgustaWestland, Bruno Spagnolini.
Orsi has always denied wrongdoing over a corruption probe looking at a 560 million euro ($749.2 million) Indian helicopter contract.
"Giuseppe Orsi, the head of Italian defence and aerospace giant Finmeccanica, was arrested on Monday in relation to a probe into international corruption. He is suspected of involvement in the payment of bribes regarding the sale to the Indian government of 12 helicopters produced by Finmeccanica's subsidiary AgustaWestland," Italian news agency Ansa said.
Prosecutors suspect that around 50 million euros (Rs 362 crore approximately), about 10 per cent of the deal were ploughed back into kickbacks to ensure AgustaWestland won the contract, the agency reported.
State-controlled Finmeccanica has previously said it has always done business in India through official channels.
Italy's corporate class has been shaken recently by a series of corruption cases, notably a derivatives scandal at Banca Monte dei Paschi and an alleged bribery case involving oil service group Saipem.
The latest series of scandals have become an issue in Italy's campaign for parliamentary elections to be held on February 24-25.
After the arrest, the Italian firm said in a statement that "Finmeccanica expresses support for its Chairman and CEO, with the hope that clarity is established quickly, whilst reaffirming its confidence in the Judges."
It added, "With reference to the precautionary measures issued today towards the Chairman and CEO of Finmeccanica and the CEO of the controlled Company AgustaWestland, Finmeccanica confirms that operating activities and ongoing projects of the Company will continue as usual."
Orsi, who had known he was under investigation over the case for months, denied any wrongdoing before his arrest and said he would only resign his post if asked to do so by the Italian government, ANSA news agency reported.
Police searched Orsi's home and the defence contractor's offices in Milan on Tuesday, it said. The company is approximately 30 per cent owned by the Italian state.
Despite initial objections by the finance ministry, the CCS had cleared the deal in 2010.
Antony had then said, "IAF and SPG repeatedly told us the helicopters were required because of the changing security scenario... the finance ministry also agreed later. The CCS then took a considered decision."
As per earlier media reports, "slush money" allegedly generated by Finmeccanica through arms contracts was used to bribe Italian political parties. The Indian VVIP helicopter deal has also come in for some mention in the reports.
After the allegations came to light, India had sought reports from the Italian investigators about their probe in the issue but no specific details were provided to it.
In Parliament, Defence Minister A K Antony had said that if any wrongdoing is found in the case, "suitable penalty measures" will be taken by the Ministry.
Antony had said the Defence Ministry was pursuing the matter and committed to take suitable penalty measures in event of allegations being substantiated.
"However, in absence of any specific information in this regard, government has not ordered any formal inquiry into the case so far," he said.