Correction, 4/08/11 - In a previous version of this story, DLA Piper partner Steven Peepels’ name was misspelled. We regret the error.
This past Saturday, India’s Central Bureau of Investigation unveiled corruption charges against Andimuthu Raja, India’s former minister for communications and information technology, and several others. Raja allegedly rigged the allocation process for mobile telecommunications bandwidth to favor certain companies, possibly costing the government a whopping $40 billion in lost license fees. The ex-minister has not yet responded to the charges, but had previously said he is innocent.

The scandal is by far the largest but not the only instance of corporate misconduct to have hit India in recent months. And lawyers in the market say they are beginning to see an impact on investor confidence.

“In my view, most of the deals in late stages are getting concluded, but a lot of the deals in the early stages are now getting put on hold,” says Rajiv Luthra, managing partner of Luthra & Luthra, one of Delhi’s leading corporate firms.

Madhurima Mukherjee, a capital markets partner also at Luthra & Luthra, says foreign investors are taking a closer look at deals in light of the scandals. “Some investors are probing further,” she says. “Some sectors are more sensitive than others and they are a bit more cautious about that. Especially the global investment banks, they have their internal compliance guys looking at this very, very carefully.”

Corruption is hardly a new phenomenon in India, but the scale of the recent scandals and the involvement of high-profile figures set them apart.

The first signs of trouble came with the 2009 accounting fraud at IT outsourcing company Satyam Computer Services Ltd. Now often regarded as “India’s Enron,” the scandal, in which Satyam founder Ramalinga Raju admitted that his company’s profits had been overstated for several years, was one of the first to hit India’s burgeoning tech sector. Raju pleaded not guilty to fraud charges and is now in prison awaiting trial.

Since then, the scandals have kept on coming. The 2010 Commonwealth Games held in Delhi became known more in India for alleged kickbacks, shoddy workmanship, and contractors working at inflated prices than for the actual athletic competition.

India’s real estate sector has been hit by a number of corruption allegations. The Adarsh Housing Society scandal, in which politicians and bureaucrats involved in the approvals for a high-rise under construction at a prime Mumbai address are allegedto have been allocated apartments in the same building, came to light last fall. In November, Indian authorities arrested eight Indian bankers who allegedly offered real estate loans in exchange for kickbacks. In December, the Securities and Exchange Board of India restricted the trading activities of several Indian real estate developers for allegedly manipulating their share prices. (Defendants in serious crimes in India do not enter pleas, as they are not permitted to bargain for reduced sentences; at least some of the defendants charged in the various scandals have already publicly said they are innocent.)

Nishit Dhruva, founding partner of M. Dhruva & Partners, a Mumbai boutique, says that lending is down in the real estate sector, as many regulators are afraid of making decisions on projects in the current environment.

Such increased caution is not confined to real estate. In the lead-up to the $3.37 billion initial public offering of Coal India last fall, the biggest ever in India, the prospectus listed as a risk factor that “certain employees and personnel . . . face allegations of engaging in corrupt practices, which may adversely impact our business reputation and operations.”

“We were just in the course of getting [retained for] a couple of issues mid to-end of January, and everyone is just pulling back and saying, ‘Hold on, let’s see what’s happening,’ ” says Trilegal capital markets partner Srinivas Partha. “ Especially if you’re talking in infrastructure or any area that requires close interaction with the government, the fear is that the bureaucracy has pretty much stopped and nothing is really moving in terms of approvals.”

The still-unfolding telecom scandal, because of its sheer size and because it involves a sector that has attracted significant investment, will no doubt wind up making the biggest waves. According to Akshay Chudasama, a Mumbai partner with J. Sagar Associates, one of the country’s largest firms, “every major corporate in India is in some way involved or impacted.”

Indeed, one company that Raja is charged with favoring in awarding broadband, Swan Telecom, is tied to one of India’s major mobile phone service providers. In the case of Swan, whose CEO was arrested along with Raja, investigators believe it worked with Reliance Telecommunications, part of the business empire of Anil Ambani, one of India’s richest men. According to the Times of India, three Reliance executives were charged with abetting fraud, while Raja and other defendants–including Swan and another telecom company, Unitech Wireless–face conspiracy, fraud, forgery and bribery charges. They face up to seven years in prison if convicted. All have denied wrongdoing.

How India will move to address corporate corruption remains an open question. While prosecutions like those coming out of the telecom scandal show that the government can get tough, Chudasama says that the problem is the inconsistency of government policy, with different agencies and courts often taking different approaches.

Chudasama thinks that a proposed 2009 Companies Bill imposing additional duties on independent directors to guard against corporate misconduct would help, but he bemoans the lack of progress in turning the bill into law

Not everyone thinks the scandals are necessarily behind the slowdown in deal activity. The privatization of the state-owned Oil and Natural Gas Corp., India’s largest oil company, has been postponed from the previous financial year to the current one. But Stephen Peepels of DLA Piper, which is advising on the transaction along with Luthra & Luthra, says that the delay is not specifically related to any of the recent headlines.

“It is just about share price,” says Peepels. “When you have a lot of market volatility–the way we have in Indian equity markets right now–it just makes it difficult to do a road show.”

But Peepels allows the spate of scandals could be having a broad impact on the market. “A reader or investor would be free to draw their own conclusion on what causes market volatility,” he says.

E-mail: kian.ganz@LegallyIndia.com. Kian Ganz is the editor of Legally India.