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Volkswagen agreement likely in March

After much dilly-dallying VW seems to have finally decided to set up its car manufacturing unit in Visakhapatnam.

india Updated: Feb 16, 2006 16:12 IST

After much dilly-dallying and controversies, German auto major Volkswagen seems to have finally decided to set up its car manufacturing unit in the port city of Visakhapatnam in Andhra Pradesh.

A memorandum of understanding (MoU) with the state government is likely to be signed next month when a team of company officials would be here to complete the formalities, said the sources in industry department.

The signing of MoU would bring an end to uncertainty which dogged the proposed project since the past three years.

The sources said after scouting Tada in Nellore district in recent months, Volkswagen opted for Visakhapatnam to set up the Rs54 billion ($1.2 billion) plant to manufacture cars and light commercial vehicles (LCVs).

This will be the second big project to come to the state. Last week, the central government announced that $3 billion (Rs135 billion) FAB City Project, India's first semiconductor manufacturing facility, would be set up in Hyderabad.

The signing of the MoU with Volkswagen would be a big victory for government, which came under sharp criticism from the opposition for bungling on the issue by paying Rs116.7 million ($2.6 million) as advance to a fictitious firm and almost losing an opportunity to get prestigious project to the state.

The deal would be even more significant considering that Volkswagen had almost lost interest in setting up the unit after the controversy over payment of advance by the state government.

The government in January last year had paid Rs116.7 million to Vashistha Wahan, a purported special purpose vehicle set up at the instance of then Indian representative of Volkswagen, Helmuth Schuster.

The amount, however, was transferred to Schuster's bank accounts and Volkswagen fired him for breach of trust.

The row, which had rocked the state government, forced Chief Minister YS Rajasekhara Reddy to shift out Major Industries Minister B. Satyanarayana and order a probe by Central Bureau of Investigation (CBI) into the whole transaction.

While Schuster is facing charges in Germany, his aide and one of the promoters of the fictitious firm, Ashok Jain, is in judicial custody.

The CBI reportedly found that Schuster siphoned off Rs 36 million ($812,000) while another director of the company, Jagdih Alagar Raja, gave a loan of Rs 50 million ($1.12 million) to VG Joseph, chairperson of Garden City College in Bangalore.

He also paid another Rs 20 million ($451,000) to his sister-in-law Gayatri in Chennai. Gayatri is also in judicial custody.

Owning moral responsibility of the illegal actions of Schuster, Volkswagen had offered to pay back the money to the state government.

The company representative and former German ambassador to India Frank Elbe had arrived here with a cheque in September last year but the government refused to accept it, saying "it is more interested in the project" and pointed out that CBI had already recovered a large part of the money.

Though Volkswagen officials had visited the state to hold talks with state officials during last few months, the company kept delaying a final decision.

At one time it reportedly conveyed to the government that it was no longer interested in Visakhapatnam due to the controversies. However, the state authorities insisted that the project should come up in port city as it was the best location.