State-run Oil and Natural Gas Corp will launch a share auction on Thursday that is expected to raise at least $2.5 billion as part of the federal government's divestment programme.

The share sale, which would be the biggest equity offering this year, will close on the same day, the country's largest oil and gas producer said.

The government will sell 5 percent of its holding, or about 428 million shares, in the offering and the floor price for the issue has been set at Rs 290 a share, ONGC said in a notice to stock exchanges late on Tuesday.

The floor price is slightly higher than ONGC's Tuesday closing price of Rs 283.40.

The government on Tuesday approved the sale through a share auction, Oil Minister S. Jaipal Reddy said, reviving the government's faltering divestment programme.

ONGC and state-run GAIL India may join a bidding war for Africa-focused gas explorer Cove Energy, becoming the second Asian state-run group seeking to trump Shell's $1.6 billion offer.

The government had earlier planned to sell ONGC shares through a public offering but that plan was scrapped last October after tepid response from investors amid weak equity markets.

India's stock market posted its first annual fall in three years in 2011, losing nearly 25 percent. Shares in ONGC, the second-largest listed firm in India by market value, fell 20 percent in the same period.

The stock market has rebounded in 2012 and the main stock index has climbed nearly 15 percent, with foreign funds scooping up beaten shares worth more than $7 billion.

The Securities & Exchange Board of India said last month that it would allow shareholders of the country's top 100 companies by market value to raise funds by auctioning their stakes through stock exchanges.

It set a minimum offer size of 1 per cent of the company's paid-up capital worth at least Rs 250 million.

Bankers said while investors would be able to participate in the auction in the same way as in the previously used follow-on share offering, the owner of a company would save significant cost and time in the auctioning process.

The sale of ONGC shares is part of the Indian government's divestment programme and other state-run companies in which it plans to reduce its holding includes Bharat Heavy Electricals and Steel Authority of India.

New Delhi is widely expected to miss its deficit target of 4.6 percent of GDP for the current fiscal year ending March, partly due to its inability to meet the budget target for more than $8.1 billion in state company share sales.

So far this fiscal year, the government has only raised about $250 million.

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