The government is likely to soon relax the norms for dilution of stake by Indian promoters of insurance companies, a move that will pave the way for Reliance Life to sell a 26 per cent stake to Nippon of Japan.

"We will soon issue a circular which will enable insurance firms to dilute promoters' stake though permissible means before 10 years of operations," official sources said.

The proposed order will help remove the ambiguity of Section 6AA of the Insurance Act. The ambiguity came to light when Reliance Life announced its plans to go for a public offer in 2009, but could not obtain regulatory approval as it had not completed 10 years of existence.

Section 6AA of the Insurance Act, 1938, stipulates that a promoter holding over 26 per cent in an insurance company, including re-insurance, will be required to divest their stake and bring it below this threshold limit in a phased manner "after a period of 10 years from the date of the commencement of the said business by such Indian insurance company or as prescribed by the central government".

This provision does not apply to the foreign promoters of insurance firms, as per the explanation of the section.

Sources said even the Law Ministry is of the view that there are no regulatory hurdles if promoters of life and general companies and re-insurance firms dilute their stake before the 10-year period stipulated in the clause.

With the enabling provision, insurance firms can dilute their stake anytime, sources said.

ADAG-promoted Reliance Life came into existence with the acquisition of AMP Sanmar in 2005. AMP Sanmar started operations in January, 2002, which implies Reliance Life would complete 10 years of operations in January next year.

In March this year, Japanese insurance firm Nippon Life Insurance Company agreed to acquire a 26 per cent stake in Reliance Life Insurance for USD 680 million (about Rs 3,060 core), subject to regulatory approval.

The transaction pegs the total valuation of Reliance Life Insurance at approximately Rs 11,500 crore (USD 2.6 billion).

As per the current rules, a foreign entity can hold up to a 26 per cent stake in an Indian insurance firm.

Nippon is the sixth largest life insurer in the world and the No 1 private life insurer in Asia and Japan.