Jaguar Land-Rover escapes the trap of state subsidy

The Indian car giant Tata Motors announced on Tuesday that it has secured £175m of private funding for its UK-based luxury car business, Jaguar Land-Rover (JLR). The news means the group will no longer seek up to £800m of state support, a position welcomed by the Business Secretary, Lord Mandelson, who was determined to limit any burden to the taxpayer.

JLR has been struggling in the recession, which was a blow to Tata as it only bought the brands from the beleaguered US giant Ford Motor Company in a $2.3bn (then around £1.15bn) deal last year.

The breakthrough will be a relief to Tata Motors, which had been involved in tortuous negotiations since first approaching the Government for help in September. Ratan Tata, the chairman of the Tata Group, hinted at his frustration when he described the talks as "protracted" in a letter last month to Lord Mandelson. Several analysts have described this as "an understatement", as the parties essentially ended up in a stand-off.

Tata insiders believed they had a right to secure state aid, following precedents set elsewhere in Western Europe. The French government has granted €3bn (£2.6bn) of loans to both Renault and PSA Peugeot to ensure their survival. JLR is a major employer in the UK, with the bulk of its 15,000 workforce based here.

As well as seeking capital in the short term, Tata Motors has been in talks with the European Investment Bank about a long-term loan of £340m. This is expected to be secured later this summer and is conditional on JLR developing environment-friendly technologies.

The balance of JLR's funding needs is expected to come from bank loans.

The news proved a boon to Tata Motors' share price. Listed on the Bombay Stock Exchange, shares in India's biggest car manufacturer rose 6.5 per cent by close of business on Tuesday and continued to soar during the rest of the week.

Paul Newton, an automotive analyst at IHS Global Insight, says this increase was overdue, as the stock had been undervalued for some time. "People are now looking at the bargains across auto stocks in some quite sound companies such as Tata Motors."

Howard Wheeldon, a senior strategist at broker BGC Partners, adds that there is now a "feel-good factor" about the company.

"JLR is a company that has more than proved its worth and capability at the forefront of the automotive industry – a company that has a future," says Wheeldon. "It has international reach and tremendous recognition that is worthy of support."

However, Tata still has an outstanding $850m of debt from the JLR purchase, which it will have to carry through a still tough market for car manufacturers, and Wheeldon believes that, over and above the 450 reduncancies made earlier this year, more will have to be made. JLR's chief executive, David Smith, admitted last week: "It will continue to be [challenging] for some time to come and we will continue to take further actions to secure the future of the business."