Geodynamics aims to produce electricity from steam heated by hot rocks deep underground in the South Australian outback.
Tata offshoot Tata Power expects to gain a board seat in the Australian company, so long as its shareholding remains above 10 per cent.
"This strategic partnership not only strengthens our renewable portfolio but also creates opportunities to get a foothold in the growing renewable energy market in Australia," Tata Power managing director Prasad Menon said.
Geodynamics and Tata Power have also agreed to review the potential of geothermal prospects outside Australia.
Tata Power will take up 11.4 per cent of Geodynamics' issued share capital for $44.1 million through a placement. This repreents 29.4 million fully paid ordinary shares at an issue price of $1.50 per share.
The purchase includes an unquoted placement option exercisable at $2.25 per share for every two shares issued - 14.7 million options - expiring on February 28, 2009.
Geodynamics managing director Gerry Grove-White said the funds raised from Tata Power's placement would strengthen Geodynamics' balance sheet.
"We are excited about this strategic partnership with Tata Power, which we hope to expand into other areas of common interest," Grove-White said.
"There are great synergistic opportunities for both the groups."
The Tata group has around 100 companies and generates annual revenues of about $US80 billion ($A95.82 billion).
Geodynamics Ltd shares closed four cents higher at $1.40.
