Tata, the Indian owner of Jaguar Land Rover, has agreed to inject "tens of millions" of pounds into the British car company to prevent an immediate cash flow crisis, while the government continues to consider the case for a taxpayer-funded bail-out.
The cash injection from Tata has bought ministers breathing space to respond to demands for multi-billion-pound loan guarantees from the car sector. Alistair Darling, chancellor, is understood to be concerned that any state support does not set too generous a precedent for other sectors.
Lord Mandelson, business secretary, is considering whether Jaguar Land Rover still needs government backing to get through the recession or whether Tata can be called on for further cash support.
Ministers have appointed KPMG, the accountancy firm, and NM Rothschild, the investment bank, to advise them on the Indian group's complex finances and to assess demands from the car sector, the Financial Times understands.
A government insider said: "They [Tata] have managed to solve the immediate difficulties so maybe they can resolve some others as well."
Lord Mandelson is understood to be sympathetic to the argument that Jaguar Land Rover could be an exception to his "no open cheque-book" rule for distressed companies, not least because of its heavy research and development investment in the UK.
The company, with 15,000 employees in Britain, is also seen as a vital contributor to the West Midlands regional economy.
But the business secretary this weekend reiterated that the state had to be a "lender of last resort" only after Tata has looked to its own resources. Any state support to Jaguar Land Rover would be conditional on the due diligence on the Indian parent being conducted by the government's City advisers, according to officials.
People close to Tata said the emergency aid to Jaguar Land Rover came on top of "hundreds of millions" of working capital it had provided since it bought the carmaker for $2.3bn from Ford in March.
The company, along with the rest of the sector, has been hit by a sharp drop in sales and the credit crunch.
Tata is understood to be adamant that its support for its UK car subsidiary does not negate its argument that the government should provide bridging loans and credit guarantees to the company and the British car sector as a whole.
UK carmakers assert they are being put at a competitive disadvantage by the UK's reluctance to act, in contrast to the bail-outs being offered by the US and continental European governments. Pressure on ministers to offer aid was increased by the Bush administration's decision last week to offer a $17.4bn (£11.6bn) loan to General Motors and Chrysler to help them survive the next three months.
British manufacturers are stepping up their warnings of job losses in the sector, including significant damage to the supply chain, if ministers refuse to act.
The Society of Motor Manufacturers and Traders wrote to Lord Mandelson on Friday to underscore its concern that he had yet to respond to requests for help made at a summit with the industry on November 27.
Unite, the union, said that tens of thousands of skilled jobs were "hanging by a thread".
Copyright: The Financial Times Limited 2008