As a precursor to the move, the name of Ipitata Refractories has been changed to Nilachal Refractories. Tata Refractories has also reduced its stake in the company from the earlier 51.9 per cent following which Nilachal now ceases to be its subsidiary.

Sources at Tata Steel said that a merger plan can now be totally ruled out as given Ipitata's financial position, it will only pull down the bottomline of the "successful" Tata Refractories. The sources added that the Tatas have already approached a few prospective buyers but talks have fallen through.

The Orissa-based company has been severely hit by the recession in its main user industries, namely steel and cement. While its reserves have turned negative, the company has been saddled with huge inventories and poor cash flow.

Consequently, several creditors have threatened it with discontinuation of raw material putting the company in a severe jam, while signs of labour unrest have also become evident, sources said.

Ipitata Refractories posted a Rs 20.5 crore turnover in the last fiscal, but ended with a Rs 19.62 crore net loss last year. It produced 21,000 tonnes against an installed capacity of 28,000 tonnes during the period.

Sources, however, said that the company has achieved a cash break even in the first half. It mainly produces fire clay and high-alumina refractories.

Tata Refractories, on the other hand, recorded a net profit of Rs 4.85 crore on a turnover of Rs 219 crore in the last fiscal. It is the only producer of burnt and unburnt dolomite refractories in India.

Ipitata Refractories had earlier been set up as a joint venture between the Tatas and Ipicol, the state investment promotion board, which held 26.43 per cent share with the Tatas holding 25.4 per cent.

In 1997-98, the Tatas bought out the entire Ipicol stake. The financial institutions currently hold 28.5 per cent in the ailing company.

The Tatas are presently going through a major restructuring within the 11 operational subsidiaries of its flagship Tata Steel, which could through a few mergers as well as the group exiting from some companies.

The cold rolling mill of Tata SSL has been transferred to Tata Steel, while the flagship has exited from Tata Timken, where it sold its 40 per cent stake to the US-based major.

Tata Steel has already announced a merger proposal of three of the engineering subsidiaries - TRF, Tata Construction and Stewarts & Lloyds - which is currently awaiting regulatory clearances.