By Makiko Yamazaki and Taiga Uranaka
TOKYO (Reuters) - A Japanese state-backed fund may invest in Toshiba Corp's memory chip business as a minority partner - a move that would help the government prevent a sale to bidders it deems risky to national security, sources familiar with the matter said.
Discussions on a potential investment are, however, at a very early stage and may not develop further as some people within the government are concerned it could be seen as a publicly funded bailout, one of the sources said.
If the fund, the Innovation Network Corporation of Japan (INCJ), teamed up with a bidder that would give the suitor a major advantage as it would represent a government stamp of approval, the sources said, declining to be identified as they were not authorized to speak on the matter.
Cutting-edge chips are at the heart of robotics, artificial intelligence and connected devices and the government is worried that key technology could be transferred to China, people with knowledge of the matter have said previously.
The government is prepared to use Japan's foreign exchange and foreign trade laws to control the auction if need be, they said.
Trade Minister Hiroshige Seko has said the ministry, which oversees INCJ, has no plans to rescue Toshiba. An INCJ spokesman said on Wednesday the fund would not comment on speculation.
Toshiba said it would not comment on specifics of the sale process. Chief Executive Satoshi Tsunakawa said on Tuesday, however, that it would take national security concerns into account.
In crisis over its Westinghouse nuclear business, Toshiba has put up most or even all of its prized memory chip business for sale to cope with an upcoming $6.3 billion writedown and to create a buffer for potential losses down the road.
Separately a person with direct knowledge said that the government-backed Development Bank of Japan would be willing to lend support. It was not immediately clear what form that support would take.
A spokesman for the bank declined to comment.
Sources have said potential bidders include Western Digital Corp which operates a Japanese chip plant with Toshiba, rivals Micron Technology Inc and SK Hynix Inc. They also include Taiwan's TSMC and Foxconn as well as financial investors such as Bain Capital.
Toshiba has so far received bids that value the entire unit as high as 2 trillion yen ($17.4 billion), said a source with direct knowledge of the matter. Bidders have been asked to present their offers by March 29, he said.
INCJ was involved in an attempt to rescue liquid crystal display maker Sharp Corp about a year ago with the government aiming to broker a merger between it and Japan Display Inc. Sharp, however, reached an agreement to be bought by Foxconn, formally known as Hon Hai Precision Industry.
($1 = 114.6900 yen)
(Reporting by Makiko Yamazaki and Taiga Uranaka; Additional reporting by Yoshiyasu Shida; Editing by Edwina Gibbs)