Japan's Honda Motor Corporation has worked out an agreement to dissolve its holding in its 26-year-old joint venture, Hero Honda, by March 2011.

According to the agreement, Honda will sell its stake in the Indian entity to the promoters of the Hero Group, the Munjals.

Japanese business daily Nikkei has reported that the deal will fetch the company around $ 1.2 billion.

Both the companies are expected to seek approval from their boards later this month.

In 1984, Honda and the Hero Group inked an agreement to manufacture and sell motorcycles in India.

The spokesperson for Hero Honda declined to comment on the development and whether any board meeting is scheduled for this month.

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Honda will continue to provide technological assistance to Hero Honda till 2014.

The pact for technological collaboration is not likely to be renewed.

Honda, it is said, is keen on focusing its resources on its wholly-owned subsidiary Honda Motorcycle and Scooter India (HMSI).

Reports of friction between the partners have being doing the rounds since Honda decided to enter the Indian market through HMSI in 1999.

Initially, HMSI manufactured scooters as its joint venture with Hero Honda precluded it from entering into motorcycles for the first five years.

Issues had also surfaced with Honda being dissatisfied with the royalty Hero Honda was paying to it in lieu of the technological assistance.

Hero Honda pays around Rs 500 crore (Rs 5 billion) to Honda annually.

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Last week, according to reports, Hero Honda had agreed to increase royalty to their Japanese partner to around eight per cent of overall sales from 2.2-3 per cent now.

Honda agreed to sell their stake to the Hero Group at a discount to the current market price of Hero Honda.

Industry sources said the Munjals had approached Honda with a proposal to buy six per cent (around Rs 10,000 crore or Rs 100 billion at current market price) of the latter's stake in the company earlier this year.

Honda was in two minds about selling as the Munjals sought a hefty discount.

Honda Motor has 26 per cent stake in Hero Honda.

The Munjals, with individual stakes and through a couple of investment companies, hold 26.21 per cent.

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The Indian promoters are said to be talking to private equity (PE) companies, including Blackstone, KKR, Carlyle, Temasek and CD&R to raise cash for funding the stake buy.

Sources said the Hero Group was keen on funding the buyout of Honda's stake through debt and kept the equity option as a final one.

While six per cent of the stake is expected to be purchased directly by the Munjals, the rest would be held by the PE firms.

Munjals would buy back the stake in tranches at a predetermined price.

Hero Honda, which is the largest two-wheeler manufacturer in the world, sold 4.6 million motorcycles last financial year, accounting for over 48 per cent of the overall sales in the Indian two-wheeler industry.

It has two plants at Dharuhera and Gurgaon in Haryana and one at Hardwar in Uttarakhand.

It has an installed capacity to roll out five million motorcycles every year.