The alliance may also lead to M&M picking up a strategic stake in the barely profitable and state-owned Proton. When contacted, an M&M spokesperson refused to comment on the development.
Sources in the automobile industry said the proposed alliance would work towards the assembly of M&M models like the Scorpio and the Bolero in the Malaysian market.
"In addition, in India, M&M can look at the possibility of a joint venture with Proton on lines similar to Mahindra Renault, the company's existing joint venture with French car maker Renault to manufacture and market the latter's Logan cars in the country," said automobile analysts in Mumbai.
Proton has been losing market share due to limited market penetration, competition in the domestic and global markets, and a lack of new models.
In a recent interview to Financial Times, Proton's Chairman Azlan Hashim had said the company was looking for partners in multiple areas: new products, components, and market access or other activities.
In another interview, the company's Managing Director, Syed Zainal Abidin Syed Mohamed Tahir, said Proton was considering selling stake to a strategic foreign partner.
Following substantial reduction in import duty to 20 per cent in 2005, the Malaysian car market is seeing a flood of new models from Japanese, Chinese and South Korean car companies. This has pulled down Proton's market share to 40 per cent now from 60 per cent in 2002. The import duty is likely to touch 5 per cent by 2008.