Nippon Life Insurance agreed to pay $290 million for a 26 percent stake in

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the asset management unit of Reliance Capital Ltd, joining other foreign fund managers seeking to tap into the country's growing middle class.

The deal comes less than a year after Nippon Life, faced with a stagnant market at home, paid $680 million for a 26 percent stake in life insurance business of Reliance Capital, which is controlled by billionaire Anil Ambani.

Foreigners are allowed hold up to 26 percent of Indian insurance companies but there is no cap for investments in fund managers.

Shares in Reliance Capital, which has a market capitalisation of $1.5 billion, rose as much as 5.2 percent on Thursday to their highest level in more than two months. The stock ended up 3.8 percent at 329.90 rupees.

"The valuation of the deal is great from Reliance Capital's perspective and the partnership may help both companies explore new markets and products," said an analyst at a Mumbai brokerage.

"Players like Nippon Life are seeing zero growth in their home markets and therefore for them it is very important to explore new markets like India," said the analyst, who declined to be named.

Reliance Capital Asset Management is the No. 2 fund manager in India with average assets under management of 823 billion rupees in the quarter ended December 31.

Nippon's purchase of a 26 percent stake values the business at $1.1 billion, or 6.7 percent of its current assets under management.

Previous such transactions in India have been valued at about 4 percent of assets under management. In mature markets, deals are often priced at 2 to 4 percent of assets under management.

"The Indian mutual fund market has grown rapidly since it was opened to the private sector in 1993," Nippon Life said in a statement.

"It is an attractive market that is expected to achieve robust growth in the long term due to the second-largest population in the world and solid economic growth led by the service sector and domestic consumption," it said.

Morgan Stanley was Nippon Life's adviser for the deal.

GROWTH PROSPECTS

Lured by the long-term prospects of Asia's third-largest economy, overseas fund managers such as US based T. Rowe Price Group Inc have been buying into Indian money managers.

T. Rowe Price paid $140 million in 2009 for a 26 percent stake in UTI Asset Management Co, which is controlled by four state-run financial institutions.

French bank Natixis struck a deal in December 2010 to buy a quarter of the asset management arm of Infrastructure Development Finance Co.

Meiji Yasuda Life Insurance Co, Japan's No. 2 life insurer, said this week it wanted to acquire one or two overseas companies in emerging economies this year, focusing on Thailand, Vietnam and India in Asia.

India's asset management business is likely to get a boost from the government's decision in August to allow overseas investors to invest up to a cumulative $10 billion in domestic equity funds.

Assets under management by Indian fund managers rose to 5.9 trillion rupees as of March 2011 from 2.3 trillion in March 2006, according to a study by PricewaterhouseCoopers.

Reliance Capital, whose other businesses include broking, consumer and commercial finance, is in talks with potential partners to sell up to 26 percent in its general insurance business, CEO Sam Ghosh said last month.

Ghosh said that Reliance was targeting a near-doubling of its assets under management and advisory business in the Europe, Middle East and Africa region to $1 billion in the next two years.