By Aftab Ahmed, Manoj Kumar and Nupur Anand

NEW DELHI (Reuters) -New Delhi wants to block Chinese investors from buying shares in Indian insurance giant Life Insurance Corp (LIC) which is due to go public, four senior government officials and a banker told Reuters, underscoring tensions between the two nations.

The state-owned LIC, which controls more than 60% India’s insurance market and has assets in excess of $500 billion, is considered a strategic asset. Sources said that the government will allow foreign investors to take part in India’s largest ever IPO, with a potential value of $12.2 million. However, they are wary of Chinese ownership.

After clashes at the Himalayan border, political tensions rose between India and China last year. India sought to restrict Chinese investments in sensitive sectors and companies, and banned several Chinese apps from mobile phones. It also scrutinized Chinese imports.

After the China border clashes, it is not possible to go about business as usual. One government official stated that the trust gap has been significantly increased and added that Chinese investments in companies such as LIC may pose risks.

They declined to name the sources as they are still discussing how Chinese investors might be prevented and no decisions have been made.

Reuters emailed them for comments but did not receive a response from the Indian finance ministry or LIC.

“It is hoped that India will provide an open, fair, just and non-discriminatory investment and business environment for Chinese companies, which is also in India’s own interests,” China’s foreign ministry said, adding economic and trade cooperation between China and India was mutually beneficial.

To solve the budget problems, Prime Minister Narendra Modi’s government is looking to sell 5%-10% of LIC in this fiscal year that ends March. According to sources, the government still has not decided whether to either sell one tranche to raise the total amount of funds or split the proceeds into two tranches.

LIC is not allowed to be invested by foreign investors under current law. However, the government may allow institutional investors from abroad to purchase up to 20% of LIC’s offerings.

Two government officials stated that there are two options to stop Chinese investments in LIC. One is to amend the law on foreign direct investing with a clause that relates specifically to LIC. The other is to create a new law specifically for LIC.

According to them, the government is aware of difficulties in monitoring Chinese indirect investments and will try to formulate a policy that protects India’s security while not deterring foreign investors.

Another option, according to one official of government and the banker is for Chinese investors not to be allowed as cornerstone investors in the IPO. But this will not prohibit Chinese investors purchasing shares in secondary markets.

Ten investment banks including Goldman Sachs (NYSE:), Citigroup (NYSE:) and SBI Capital Market have been chosen to handle the offering.

($1 = 73.8200 Indian rupees)