MUMBAI - The Indian government is looking to sell a 60.72% stake in $5.6 billion IDBI Bank and has invited expressions of interest, it said on Friday, setting the ball rolling on a series of planned divestments to reduce the budget deficit.

In 2020, Finance Minister Nirmala Sitharaman announced plans to privatise most state-run companies, including banks, mining companies and insurers. Many state-run banks are saddled with bad debt and have been a drag on growth.

State-owned Life Insurance Corporation of India will be diluting its holding in IDBI Bank as part of the sale process with the total stake sale comprising a 30.48% stake from the government and a 30.24% stake from LIC.

At the end of June the Indian government held 45.48% of IDBI bank while LIC held 49.24%.

IDBI had a market value of 459.13 billion rupees ($5.57 billion) as of Friday's close.

Banks, foreign lenders, shadow banks, alternate investment funds and offshore funds have been allowed to place bids. However, large industrial and corporate houses and individuals are not eligible to bid.

Bids can be submitted by single entities or as part of a consortium and potential bidders should have a minimum capital net worth of at least 225 billion Indian rupees or $2.85 billion.

The short-listed bidders will also have to pass a "fit and proper" assessment of the central bank. The successful bidder will be required to make an open offer to public shareholders of IDBI Bank.

The public holds a 5.29% stake in IDBI Bank as of the end of June.

The successful bidder will also be mandated to lock in at least 40% of the paid up and voting equity share capital of IDBI Bank for five years from the date of the acquisition.

In the case of a consortium, there will be a lock-in in proportion to holdings of the investment vehicle, according to the central bank guidelines.

The ceiling on voting rights is set at 26% in line with existing rules for private banks. Even though state-owned LIC and the government hold a majority stake in IDBI Bank, the government categorises it as a private lender.

The last date for submission of expression of interest has been set at Dec 16.

The government announced plans to sell its stake in IDBI Bank last year, something it has considered for several years.

"The bank's financial health has improved and it is in a much better position now, so it may not be as difficult to divest a stake in the bank as it was five-six years ago," said Ashvin Parekh, an independent banking consultant.

IDBI is a mid-sized lender which in the three months to June 30 made a net profit of 7.56 billion rupees, up from 6.03 billion rupees a year earlier. Net bad loans were 19.9%.

(Reporting by Nupur Anand, Editing by David Goodman and Elaine Hardcastle)