The government on Thursday approved the sale of 20% stake in Steel Authority of India Ltd (SAIL) through a two-stage follow-on public offer (FPO), a decision it expects will help it meet the target of raising Rs 40,000 crore through disinvestments in 2010-11.

The government had failed to raise the targeted sum of Rs 25,000 crore last financial year, as some big-ticket public offers failed to draw the expected response from retail investors and mutual funds.

The public offers of NHPC, Oil India Ltd, Rural Electrification Corporation, NTPC and NMDC could together garner only Rs 23,552 crore. India ?s largest institutional investor LIC had to virtually come to the rescue of the government to get these issues fully subscribed and in the latest case of NMDC FPO, about two-thirds of the issue was subscribed by the life insurance major.

Government managers are, however, hopeful of a much better retail response to the FPO of the low-cost steel producer, considering the fast growth in per capita use of the alloy in the country which is investing heavily in infrastructure industries. The SAIL stake sale will take place in two tranches, each carrying 5% government shareholding and 5% fresh shares of the company. At its current share price of Rs 236.75, the government will be able to raise Rs 17,000 core from the issue.

After disinvestment, the government?s stake will come down from a little over 85% to 69%, home minister P Chidambaram told reporters.

?The public holding in SAIL would be enhanced from the present level of 14.2% to 31%, and it is expected that the enhanced holding would lead to greater depth in the market,? he added. SAIL would use proceeds from the public issue to fund its capital expenditure, even as the company is facing diminished margins and rising pressure on input prices. The PSU steel maker is in the process of increasing its installed hot metal production capacity from existing 13.82 million tonne a year to 23.46 MTs per annum at a cost of Rs 70,000 crore.