India's government may let its stake in State Bank of India fall by 4.4 percentage points to 55 percent, a top federal official said on Wednesday, as the country's top lender looks to raise equity this year.

At current values, the stake would be worth about 48 billion rupees ($990 million). The government's shareholding could be lowered through an issue of new capital that the government did not subscribe to, or it could sell of some of its shares.

The government will seek cabinet approval to dilute its 59.41 percent stake in India's biggest bank, Finance Secretary Ashok Chawla told Reuters.

"The government will have to take the approval of the cabinet to reintroduce the bill in parliament," he said. "The bill said the government's stake may be lowered up to 55 percent in SBI." SBI chairman O.P. Bhatt said in January the bank, which controls a quarter of India bank loans and deposits, may need to raise between $2 billion to $4 billion in equity during 2009/10.

"The move clears the way for the bank to raise capital as and when required without the government having to chip in to maintain its stake," said Abhijit Majumder, an analyst at brokerage Prabhudas Lilladher.

When SBI raised $4 billion through a rights issue in 2008, the government issued bonds to the bank in lieu of cash to maintain its stake. But such funding would be harder now, with the government facing its biggest fiscal deficit in 16 years and projecting record borrowing this fiscal year.

As well, a rally of about 90 percent in India's benchmark stock index BSE from its 2009 low in mid March and rising foreign appetite for Indian assets have revived share sales.

Indian firms have raised more than $7.5 billion in equity so far this year, surpassing the full-year total for 2008, according to Thomson Reuters data. Further, foreign funds have bought a net of $8.7 billion in Indian stocks since mid-March.

State Bank had a capital adequacy ratio of 12.97 percent in March, lower than 15.5 percent at private sector rival ICICI Bank and an end-June level of 15.4 percent for HDFC Bank.

At 0812 GMT shares in SBI, which the market values at $22.6 billion, were up 0.3 percent higher at 1713.70 rupees in a a Mumbai market that was down 0.8 percent.


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