Life Insurance Corporation is set to step in to rescue banks and financial institutions in their plan to settle the dues of foreign lenders as well as equity holders of the 2,184 megawatt Dabhol power project.

LIC [Get Quote] will buy around Rs 1,500 crore (Rs 15 billion) government bonds that will be floated in the market to generate funds to support the buyout programme.

The deadline for completion of the buyout plan expires in end May.

According to sources close to the development, the Employees Provident Fund Organisation -- which was earlier approached for investing in the debt issue -- has backed out.

LIC will now subscribe to these bonds. A special purpose vehicle, Gas and Power Investment Company, will float these bonds.

Confirming the development, official sources in LIC said the corporation board had already given its in-principle approval to pick up the instrument when it hits the market.  The bonds will have a 15-20 years of maturity and will be backed by the central government guarantee.

The Indian lenders have reached an agreement to buy out foreign lenders' debt exposure to the project at a discount of around 30 per cent.

It will also buy out the equity exposure of GE and Bechtel.

The total cost of the buyout will be around Rs 3,000 crore (Rs 30 billion). State Bank of India [Get Quote], ICICI Bank [Get Quote], Industrial Development Bank [Get Quote] of India will also chip in fresh fund to support the buyout plan.

The SPV has been floated for the financial restructuring of the Dabhol power project. The SPV has already applied to Reserve Bank of India and Securities and Exchange Board of India for approval.

While RBI approval is needed for setting up the entity as a non-banking finance company, Sebi has to list the entity so that the debt instruments could be traded in the secondary market.

Sources said that the guarantee will be part of the original unconditional guarantee offered by Government of India to Dabhol project in mid-1990s. Therefore, no extra budgetary provisioning needs to be done to take care of the bond programme.

The Indian banking community, led by State Bank of India, ICICI Bank, Industrial Development Bank of India and Canara Bank [Get Quote], has over $1.3 billion exposure to the beleaguered utility company.