The Indian government is set to raise at least $2.5 billion by selling a 5 percent stake in Oil and Natural Gas Corp (ONGC) on Thursday, aiming to patch up its widening fiscal deficit and revive its stalled privatisation agenda.

The long-delayed ONGC sale, set to be the biggest equity offering in India this year, will be done via an auction on the stock exchange, the first to use this newly approved sales method which avoids expensive roadshows and saves time.

Shares in ONGC, the country's largest oil and gas producer and second-largest listed firm in India by market value, rose as much as 4.8 percent on Wednesday, outpacing the wider market, amid expectations that the offer would meet strong demand.

"There is no doubt that the issue will be fully subscribed considering there are state-run financial institutions and others who will bid," said RK Gupta, managing director at Taurus Mutual Fund.

"And a strong response to this issue opens the door for more government divestment programmes," he added.

The floor price for the company's share auction has been set at 290 rupees, the company said in a notice to stock exchanges, slightly higher than its Tuesday closing price of 283.40 rupees. On Wednesday, the stock traded at 297.50 rupees at 0558 GMT.

The offer is likely to see strong demand from both overseas and Indian investors, sources with knowledge of the situation said.

India's stalled divestment programme also calls for reduced holdings in other state-run firms such as Bharat Heavy Electricals and Steel Authority of India.

New Delhi is widely expected to miss its deficit target of 4.6 percent of GDP for the current fiscal year ending March, partly due to its inability to meet the budget target for more than $8.1 billion in state-company share sales.

So far this fiscal year, the government has only raised about $250 million.

The government had earlier planned to sell ONGC shares through a public offer but that plan was scrapped last October after a tepid response from investors amid weak equity markets.

India's stock market posted its first annual fall in three years in 2011, losing nearly 25 percent. Shares in ONGC fell 20 percent in the same period.

But the stock market has rebounded in 2012 and the main stock index has climbed nearly 15 percent, with foreign funds scooping up beaten shares worth more than $7 billion.  - Reuters