IFCI, say sources, owes nearly Rs 500 crore (Rs 5 billion) in debt to LIC [Get Quote], which has the option to convert it into equity and take its total stake from 8.4 per cent now to 49 per cent.

IFCI's proposed strategic sale has attracted expressions of interest from 10 entities. Of those, IFCI representatives today met the eight shortlisted ones.

The successful bidder will also have to make an open offer for another 20 per cent to take its total holding to 46 per cent.

Companies interested in buying a stake in IFCI are aware of LIC's option to convert its debt into equity at par value. They said they would seek a clarification from the government on this before putting in their bids.

LIC sources confirmed the possibility but declined to divulge its debt exposure to IFCI. They were quick to add that LIC did not want to wrest management control at IFCI, saying: "We will continue to be a financial investor."

LIC might consider the conversion at some point in future, after IFCI's stake sale. "The fund is being raised to turn around IFCI. Let it start performing," said an LIC insider.

However, sources close to IFCI said LIC would need the permission of the government, which controls both LIC and IFCI, to convert its debt into equity.

"The clause that empowers LIC to convert debt into equity is unlikely to have a great impact as LIC requires the government's permission to do so and the government is supporting IFCI," a source added.

Industry experts said that the fact that LIC had right to convert debt into equity would cast its shadow on IFCI's proposed stake sale.

The apprehension has its effect on the share prices of IFCI today.  The IFCI stock lost 4.18 per cent to close at Rs 96.35 in a strong Mumbai market.

The meeting would be followed by a request for proposal, which would be floated in the second week of this month.