The Communist Party has accused the BJP-led government of sending "mercenaries" in the guise of job-seekers to help occupation forces in the country.
Responding to the charge, the federal government in New Delhi on Monday said it had ordered a probe into reports that private security agencies had illegally hired 1,500 ex-combat troops as private guards to protect installations in Iraq.
Foreign Minister Yashwant Sinha said his ministry had asked the labour ministry to launch an inquiry "and take appropriate action against agencies which had fraudulently taken these men without valid documents."
"These men were originally permitted to go to Jordan and Kuwait," Sinha told a news conference in southern city of Chennai.
New Delhi banned Indian citizens from travelling to Iraq in April because of deteriorating security there and the bar would only be lifted once the situation improved, Sinha said.
Before the ban came into force, the foreign ministry permitted some Indian companies to send 360 men to safeguard their offices in Iraq, he added.
"These men were originally permitted to go to Jordan and Kuwait"
foreign minister, India
Reports in the Indian media said the ex-soldiers applied for permits to work in Kuwait and Jordan but travelled instead to Iraq.
India has turned down US requests to send a military contingent to the occupied country, saying it could only do so if the United Nations called for an international peacekeeping force.
Bombay-based Trig Guard Force, the privately-run security agency which has admitted recruiting ex-soldiers as guards in Iraq, said it has stopped the deployment because of the worsening situation there.
"Most companies there prefer Indian security agencies as we offer services at less than half the price," said chief executive Swaran Salaria.
Military sources said at least two other security agencies had hired ex-soldiers to work in Iraq.