DaimlerChrysler AG of Germany has taken a call option to buy 26% in Jalandhar-based bus body builder Sutlej Motors.
The proposal was recently cleared by the Foreign Investment Promotion Board (FIPB).
The Indian company had signed an agreement with Daimler last year to jointly make fully built buses from Daimler's Chakan facility based in Pune.
Under the agreement, DaimlerChrysler will produce and supply bus chassis and Sutlej Motors will attach the body.
DaimlerChrysler India (DCIL), which is a 100% subsidiary of DaimlerChrysler AG (DCAG), will also handle sales and after-sales services of the coaches, which are expected to be launched in India in the first quarter of 2008.
SML, which started making bus bodies in 1965, is one of the country's biggest coach manufacturers.
DaimlerChrysler is the world's biggest bus manufacturer. DCIL already makes chassis in India.
A DaimlerChrysler delegation from Germany headed by Wolfgang Diez, head of the DaimlerChrysler buses and coaches business unit, visited India last year to assess the market.
The German company expects the demand for high-end buses to grow as a result of India's improving road network and the increasing need for efficient public transport systems.
Other companies that are working on developing luxury inter-city buses for Indian and global markets are Tatra Vectra, Asia Motor Works (AMW), Man-Force and Scania.