Ind Auto's proposal has come in the wake of recent amendments made by the state government to the Package Scheme of Incentives. This will be applicable to the automobile sector with an investment of Rs 1,500 crore, and more in the Mumbai Metropolitan Region and Pune Metropolitan Region.

Mantralaya sources said that the government was scrutinising Ind Auto's proposal. They reiterated that the sales tax incentives would be offered for new units or expansion of the existing units with an investment of Rs 1,500 crore or more.

Observers say this condition will automatically disqualify Ind Auto from getting the exemption as it has invested only around Rs 950 crore so far. The state has granted theseincentives to Fiat Auto's Rs 2,000-crore greenfield project being planned in Ranjangaon near Pune, which will have a capacity of 100,000 vehicles.

It remains to be seen if the company will continue with this project as the capacity at the Kurla plant seems to be adequate given the slowdown in the auto sector. Hence, experts believe Fiat is possibly trying to get these concessions "transferred" to the three-decade old Kurla plant, and put the Ranjangaon plan on hold.

Ind Auto began operations at the plant in January 1998. The plant has the capacity to manufacture the Uno, Siena and Palio (the last two were planned for Ranjangaon). The plant also caters to the production of Premier Auto's Padmini model.

The Ind Auto proposal to the state indicates that PAL entered into a technical agreement with Fiat Auto in 1995 to produce the Uno, following which, investments were made to modernise the facility.

The Uno was launched in 1996, but shortly thereafter, labour trouble paralysed operations for nearly eightmonths. At this stage, PAL's lenders held back loan disbursements and no fresh loans were approved.

To continue running the Kurla plant and ensure jobs for about 3,000 employees, PAL agreed to enter into a joint venture with Fiat Auto in July 1997. It was followed by the spin-off of the Kurla factory, with the Uno business from September 29, 1997, yielding majority control to Fiat.

During this period, PAL invested about Rs 175 crore, mainly towards setting up a paint shop, the Uno assembly line, restructuring and renovating the Kurla plant. PAL transferred the Uno business along with new investments and existing land and machinery to the joint-venture company at a gross value of Rs 602 crore.

PAL carried out valuation of the deal through YH Malegam of SDB Billimoria & Co, who confirmed the gross value terming it "reasonable." Ind Auto invested Rs 200 crore during October 1997 and December 1998, and also paid a stamp duty of Rs 28 crore as transfer charges including immovableassets.

INSIGHT:

Policy change needed: Once Telco was given a sales tax exemption for the Indica, there was always a threat that other companies might be tempted to ask for similar relaxations by extending the scope of the policy to include other projects. Now, Ind Auto is asking for the same, which will necessitate a further amendment to the policy if this request is to be granted. There is no real reason to grant this tax exemption even for a period of two years to Ind Auto, for this benefit will be given to an existing plant and will not be linked to capital invested at current prices as in Telco's case, which is what the policy amendment seeks to promote.