Life Insurance Corp of India (LIC) is planning to transfer nearly $22 billion from policy holders' funds into a fund earmarked to pay dividends or issue bonus shares, two sources said on Friday, as the country's largest insurer aims to shore up both its own net worth and investor confidence.

The state-owned insurer listed on Indian stock exchanges in May, but its stock has since dropped by more than 35%, wiping off nearly 2.23 trillion Indian rupees in investor wealth.

LIC is now looking to looking at steps to revive its share price, said a government official, who did not want to be named.

The company plans to transfer 1.8 trillion Indian rupees ($21.83 billion), a sixth of the 11.57 trillion rupees lying in its non-participating fund, to its shareholders' fund, according to an official aware of the matter.

Life insurance companies primarily sell two types of products: the first are 'participating policies' where profits are shared with customers and second are 'non-participating,' or 'non-par,' policies that have fixed returns. LIC parks the premium it collects from the latter in a non-participating fund.

Transferring some of that into the shareholders' fund is one way to shore up investor confidence as it would be an indicator of higher dividend payouts in the future, both the officials said.

The surplus in the non-participating fund is earmarked for shareholders and can be transferred to shareholders fund with approval from LIC's board, which is yet to be sought, they said.

The transfer, if concluded, would boost LIC's net worth by about 18 times from its current value of about 105 billion rupees and top the net worth chart among insurers, including SBI Life and HDFC Life, both the officials said.

LIC and finance ministry did not immediately respond to emails from Reuters seeking comment.

A bigger shareholder fund would draw the attention of new and existing investor as the amount would be used by LIC to transfer dividend or issue bonus shares in future, said Harvinder Singh, a partner at law firm DSK Legal.

LIC shares were priced at 949 a piece during listing but are currently trading below 600 rupees.

Seven of nine brokerages covering the stock have 'buy' or 'strong buy' rating, with the median price target of 840 rupees, according to Refinitiv data.

"The move would increase the book value per share and may help in improving the sentiment around LIC's shares, but could keep the upside limited," said Ankur Wahal, senior vice president at BOB Capital Markets.

($1 = 82.4450 Indian rupees)

(Reporting by Nikunj Ohri; Editing by Savio D'Souza)