Market regulator Sebi approved the government's proposal to convert dues of over $1.92 billion by telecom operator Vodafone Idea to equity, two senior government officials said on Thursday.
Last year, India had approved a rescue package for debt-strapped telecom companies that allowed them to convert interest on deferred adjusted gross revenue owed to the government into equity.
Among the country's three major telecom players, including Bharti Airtel and Reliance Industries' Jio, the government package was seen as a bailout for Vodafone Idea, which was on the verge of bankruptcy.
"SEBI (Securities and Exchange Board of India) has approved the government's proposal to come in as a financial investor. This has been communicated to the telecom ministry," one of the officials, who did not want to be named, told Reuters.
The government's stake in Vodafone after the conversion could be more than 30%, the official added, which would make it one of the largest shareholders in the company along with UK's Vodafone Group and Aditya Birla Group.
SEBI has also approved the government's request to classify its shareholding in Vodafone Idea as public float, both the officials said.
The market regulator's guidelines state that only stakes up to 10% can be classified as public shareholding.
The finance and telecom ministries, SEBI and Vodafone Idea did not immediately reply to request for comments.
The government will sell its stake in the telecom operator once it is turned around, one of the officials said.
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