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India hit by growing banking scandal, shares fall

Shares in state-run financial firms named in a bribery scandal fell sharply today, a day after eight top officials were arrested by the CBI in India's third biggest corruption scandal in the past few months. The scam saga

business Updated: Nov 25, 2010 14:37 IST

Shares in state-run financial firms named in a bribery scandal fell sharply on Thursday, a day after eight top officials were arrested in India's third biggest corruption scandal in the past few months.

The Delhi-based Central Bureau of Investigation (CBI) said on Wedneday the officials received bribes valued at hundreds of millions of dollars.

The arrests come on the heels of an alleged multi-billion dollar telecom corruption scam that has forced the telecom minister to resign and has paralysed Parliament.

The government and one of the companies whose executive was arrested said the alleged corruption were of an individual nature.

"It is an insignificant amount... it is individual personal greed, it is not systematic failure," R Gopalan, secretary financial services told NDTV late on Wednesday.

Those arrested included the chief executive of LIC Housing Finance and senior officials at state-run Central Bank of India, Punjab National Bank and Bank of India, the CBI said.

Shares in LIC Housing Finance fell more than 10%, while Punjab National Bank and Bank of India were down 3% and 2.3% respectively. Stocks later rebounded.

Government officials contacted by Reuters said there were no special meetings planned to discuss the bribery case.

The officials, who asked to remain anonymous, said the federal investigative agency CBI would be handling the case.

The individuals under arrest received bribes from private finance firm Money Matters Financial Services, which acted as a "mediator and facilitator" of corporate loans and other facilities, the CBI said on Wednesday.

The CBI did not provide financial details of the charges. Analysts said many corporate houses could also be probed for possible involvement.

Analysts said they did not expect any major repercussions from the scandal, although the government is already on the defensive over a separate telecoms scandal and a corruption scam involving the Commonwealth Games last October.

"We don't think it'll turn into a major political issue, although the Indian government's reputation has been damaged," said Taipei-based Michael Huang, portfolio manager of Yuanta India Fund.

"Banking shares and the broader stock market will bcontinue to be hit. We'll take this chance to buy Indian shares at dips," he said.

Telecoms Minister Andimuthu Raja was forced to resign more than a week ago after a state
audit accused his ministry of selling licences and spectrum too cheaply in 2007-2008, potentially depriving the state of $39 billion in revenues.

The opposition has disrupted business in parliament since Nov 9, demanding the Congress party-led coalition government agrees to a full parliamentary investigation into alleged corruption in the telecoms ministry.

That has weakened the government's ability to move key economic measures and delayed legislation, although the government is not at risk of collapsing.

Corruption has long been a major problem in Asia's third-largest economy, although the recent scandals are seen as among the biggest in the country's history.

"Anyone who has been an investor in India, has to be familiar with issues like these," Vikas Pershad, Chief Executive of Veda Investments in Chicago.

"This would lead to preference towards quality stocks in the near term, but the larger picture is attractive. The long-term growth story is intact," Pershad said.