Andhra Pradesh had hoped for a VW factory

Volkswagen has postponed making a decision on plans to build the factory in the wake of the allegations.

The factory was to be based in the southern state of Andhra Pradesh.

On Wednesday, Andhra Pradesh chief minister YS Rajashekar Reddy ordered an investigation by the Central Bureau of Investigation (CBI).

The scandal was triggered by the surprise resignation last month of Helmuth Schuster, the former personnel chief of Volkswagen's Czech unit, Skoda.

Mr Schuster quit amid allegations he took bribes from potential suppliers and set up companies to secure foreign contracts for Volkswagen.

'Money paid'

Reports say that the Andhra Pradesh government deposited more than $2m, as its part of the proposed plant's equity, in the account of a Delhi-based company.

The state government came under attack when Mr Schuster was removed by Volkswagen for alleged fraud and criminal breach of trust.

In a related development, Andhra Pradesh industry minister Botch Satyanarayana has been moved from his post.