According to the proposal still being finalised, IFCI is keen that a Rs 170-crore grant be converted into equity in the financial institution. KFW had given a grant of Rs 170-odd crore to IFCI some years back.

Sources said that the proposal is yet to be put up before the board, adding that the move has been initiated by IFCI.

When contacted, IFCI chairman PV Narsimhan, said that "at this point, there is no proposal before the board".

Sources said IFCI is keen that the reconstruction bank picks up the stake though it may take a while to complete all formalities and get the necessary clearances. It is not clear how KFW would respond to such a proposal.

After ICICI, IFCI would be the second major financial institution in which a foreign equity holding may come in.

Market watchers say that if the proposal if implemented may do the beleagured institution some good as well as strengthen its capital base. The recapitalisation of the financial institution is an important factor, sources pointed out.

Post rights and as on March 2000, Industrial Development Bank of India (IDBI) has a majority stake of 31.7 per cent and LIC, GIC along with other insurance entities hold an equity stake of 17.5 per cent. The equity of nationalised banks is around 7.1 per cent, SBI and other subsidiaries hold 2.1, Unit Trust of India 4.5 per cent, while the balance is public.The financial institution had floated a rights issue in the ratio of 1:1 aggregating Rs 352 crore in December 1999. Most of the shareholders are understood to have subscribed to the issue. The institution had raised around Rs 286 crore.

In a restructuring drive, the FI is making attempts to reduce its debt-equity ratio and prune its sanctions this year.

It is also considering to give loans to the `new economy' sectors, but has not taken a decision as yet as there is no guaranteed returns in the IT sector. The financial institution has burnt its fingers in the past and has substantial NPAs.

IFCI has appointed an expert committee under the aegis of former State Bank of India chairman D Basu for advising on restructuring and future business strategy. The committee is expected to give its interim report in September.

The committee is expected to advise on issues of becoming a universal bank or continuing as a development financial institution, and examine IFCI's asset-liability profile, financials and suggest an action plan to meet these requirements.