The board of LIC on Monday gave approval to the insurer to acquire IDBI Bank by raising its stake to 51 per cent via preferential shares.
After the approval, both the entities will seek regulatory clearances including from Securities and Exchange Board of India (Sebi), and Reserve Bank of India (RBI).
Insurance Regulatory and Development Authority of India (Irdai) has already given approval to LIC for the stake purchase, a move which will help the debt-ridden state-owned bank get a capital support of Rs 100-130 billion.
Irdai at its meeting held in Hyderabad last month, had permitted LIC to increase its stake from 10.82 per cent to 51 per cent in IDBI Bank.
According to the current regulations, an insurance company cannot own more than 15 per cent in any listed financial firms.
LIC has been looking to enter the banking space by acquiring a majority stake in IDBI Bank as the deal is expected to provide business synergies despite the lender's stressed balance sheet.
It will get about 2,000 branches through which it can sell its products, while the bank would get massive funds of LIC.
The bank would also get accounts of about 220 million policy holders and subsequent flow of fund.
If the deal goes through, IDBI Bank, which is grappling with mounting toxic loans with gross non-performing assets at a staggering Rs 556 billion at the end of the March quarter, will get the much needed capital support to revive its fortune.
During the January-March quarter of last financial year, the lender's net loss stood at Rs 56.63 billion. The government would not get the proceeds from the stake reduction as the money would be utilised for the bank's revival.
It could happen through issuance of fresh equity so that the government's stake which is presently at 86 per cent comes down to below 50 per cent as announced in the Budget.