Nov. 30 (Bloomberg) -- State Bank of India, the nation's biggest, won approval for its first share sale in a decade, tapping government funds to help prepare for the easing of curbs on international lenders in 2009.

The state-owned bank plans to raise 167 billion rupees ($4.2 billion) from stakeholders, a government spokesman said in New Delhi on condition of anonymity. The Ministry of Finance will contribute 100 billion rupees to retain its 59.73 percent stake, the official said.

Chairman Om Prakash Bhatt says the bank will face competition from Citigroup Inc. and Industrial & Commercial Bank of China Ltd. when they're allowed to buy rivals and sell shares in India. The bank has also lagged behind Indian publicly held lenders led by ICICI Bank Ltd. that have raised $8 billion to fund loan growth in the world's second-fastest growing economy.

``State Bank of India is one of the best plays on the economy and there will be a lot of interest,'' said Sam Mahtani, who manages $5 billion in emerging markets at F&C Management in London. The fund owns State Bank of India, ICICI Bank, HDFC Bank Ltd. in its $450 million investment in Indian stocks.

A share sale will help the 200-year old bank bolster its capital and meet credit demand in an economy that is heading for its fifth year of at least 8 percent growth. State Bank's $187 billion of assets are about a 10th of New York-based Citigroup's and a fifth of Beijing-based ICBC.

Government Holding

State Bank gained 30.5 rupees, or 1.3 percent, to 2,300.3 at the 3:30 p.m. close on the Bombay Stock Exchange. The stock has risen 85 percent since Jan. 1, outpacing the 40 percent advance in India's Sensex index. Overseas investors hold the maximum permissible 20 percent in the bank.

The government will issue bonds for the 100 billion rupees of shares it is buying, Priya Ranjan Dasmunsi, minister for information and broadcasting, said in New Delhi. The government must own at least 55 percent of State Bank, and 51 percent of other government-run banks.

The bank said last month it had asked for permission to raise as much as 200 billion rupees to invest in its more than 9,500 branches and meet demand for loans from 100 million customers. The bank's rights issue will probably be completed by March, Dasmunsi said.

Share Sales

State Bank of India's sale follows a $5 billion issue in June by ICICI Bank, the nation's second biggest by assets.

HDFC Bank Ltd., the third-biggest by market value, and Axis Bank Ltd. raised about $1 billion each, while Infrastructure Development Corp. of India raised $519 million selling shares in July, as Indian lenders seek size to tap opportunities in a nation of 1.1 billion people.

The bank may need as much as 1 trillion rupees over the next five years to boost loans, Chairman Bhatt said in June. The bank's share of loans in India has declined to 15.4 percent as of Sept. 30, from 17.4 percent in March 2003.

India's $906 billion economy may grow at 9 percent, after an average 8.6 percent growth in the past four years. Asia's third- largest economy expanded 8.9 percent in the three months to Sept. 30 from a year earlier after a 9.3 percent increase in the previous quarter, the statistics office said today in New Delhi. Analysts expected an 8.7 percent gain.

Investment Needs

India needs about $500 billion of investment to bolster its infrastructure in roads, ports, airports and electricity generation plants to sustain its 9 percent growth, Finance Minister P. Chidambaram said in October.

Bank lending has grown more than 27 percent in the past two years, according to central bank data. State Bank, which gives more than half its loans to companies, said credit rose 26 percent as of Sept. 30 from a year earlier.

The central bank said it may permit overseas banks to acquire local non-state banks after April 2009 as also allow units of overseas banks to sell a fourth of their shares to Indian investors.

To contact the reporter on this story: Sumit Sharma in Mumbai at sumitsharma@bloomberg.net

Last Updated: November 30, 2007 05:40 EST