Though the venue for the negotiations had not been decided, it could be either in the Capital or in Geneva. In case, EU feels that no understanding would be possible with India, then it could ask World Trade Organisation (WTO) to set up a dispute settlement panel (DSP). EU had sent a formal notice to India for consultations during the second week of October after EU council of foreign ministers decided to drag new Delhi to the WTO. EU decided to take up the issue, saying India's automobile policy was "discriminatory" against foreign automobile manufacturers.

India's automobile policy requires foreign and joint venture manufacturers to sign a memorandum of understanding (MoU) with the government on import of auto kits.Among other things, the policy stipulates neutralisation of foreign exchange outgo through car kits imports and indigenisation level of 50 per cent in three years and 70 per cent in five years. India maintained that its automobile policy is transparent and the MoU is required in view of import curbs on balance of payment (BoP) grounds.

EU had decided to challenge India's automobile policy mainly in view of the hue and cry raised by car makers in the member-countries. They claim indigenisation level, called as local content requirement (LCR), was not in conformity with WTO norms. The EU car makers also pointed out at a WTO decision striking out a LCR norm imposed by Thailand in this regard.

Commerce ministry sources said the fact that six car ventures had signed MoU with government was a fair indication of the policy's transparency. The LCR had been imposed in view of India's BoP problems.