India has put on hold all defense contracts with Rolls-Royce following allegations that the company paid bribes to win lucrative contracts to supply Hawk advanced trainer jet engines to state-run Hindustan Aeronautics Ltd. (HAL), a defense ministry official says.

Not only is the decision a serious blow to the aircraft engine-maker, but it also threatens to delay upcoming Indian air force purchases and impact other existing programs.

India's defense ministry has ordered an inquiry by the Central Bureau of Investigation (CBI), the country's main investigative agency. “The agency will investigate all contracts Rolls-Royce signed with HAL during 2007-11,” the official says.

HAL's vigilance unit received a tip about a bribery trail in the contracts, which are worth more than $1.2 billion, according to a HAL official.

“We had received a letter from Rolls-Royce in December 2013 stating that they had appointed an 'adviser' to negotiate and oversee the supply of aero engines to HAL from 2007 to 2011. This is against our integrity pact, and since we feared that there could be some illegal payments involved, we decided to refer the matter to the defense ministry and the CBI,” a HAL official says.

Such middlemen are banned under India's defense procurement system, he notes. The company's India office declined to comment on the issue.

The investigation is a setback for Rolls-Royce, the world's second-largest maker of aircraft engines behind General Electric, which has a huge presence in India across defense and civil aerospace as well as the energy and marine sectors. Rolls-Royce has more than 1,350 engines in service in the country, including RB211s that power major gas pipelines with the Gas Authority of India Ltd.

Rolls-Royce's military reach includes Hawk Advanced Jet Trainers (AJT) used by the air force and navy. It provides Adour Mk. 871 engines to power the Hawk AJTs being made by HAL under license from BAE Systems. Rolls-Royce makes the engines for Lockheed Martin C-130J transport aircraft, as well.

The contract hold also will delay several planned Indian air force acquisitions, including the Airbus A330 Multi-Role Tanker Transport and ShinMaywa US-2 amphibious aircraft from Japan, which have Rolls-Royce AE2100 engines.

The U.K.'s Serious Fraud Office also has an investigation underway into Rolls-Royce's activities in foreign markets. The company announced in December that it had launched a “formal investigation” relating to “bribery and corruption in overseas markets.”