MUMBAI: Japan's Nippon Life Insurance Company is buying a 26 percent stake in India's Reliance Life Insurance for $680 million, the Indian company said on Monday, sending shares of Reliance's parent up more than 10 percent.

The news comes as Japan is grappling with the impact of Friday's devastating earthquake and tsunami as well as radiation leak from an earthquake damaged nuclear power plant.

Japanese stocks closed down more than 6 percent on Monday, and the yen fell against the dollar Nippon Life, Japan's largest private life insurer, is a major investor in domestic markets.

The stake purchase by Nippon Life is the latest move by a Japanese insurer to expand overseas as the country's traditional life insurance market shrinks with an ageing population.

Indian rules do not allow foreign companies to own more than 26 percent stake in an Indian insurance joint venture.

The transaction values Reliance Life Insurance, a unit of billionaire Anil Ambani controlled financial services firm Reliance Capital, at $2.6 billion, the statement said, adding the deal is subject to regulatory approvals.

Shares in Reliance Capital, which has a market value of about $3 billion, rose as much as 7.2 percent to 549 rupees, their highest level in one and a half months after the stake sale announcement.

The main index was up nearly 1 percent.

"India is a highly under penetrated market for insurance products and, hence, there is lot of potential for all the players in the market," said Jagannadham Thunuguntla, head of research at SMC Global Securities in New Delhi.

"It's a very capital intensive business and the companies here have fewer options to raise funds," he said.

"This fund infusion will definitely help Reliance Life Insurance to compete with its peers aggressively for a bigger market share."

Reliance Capital has said in the past that it was looking to bring in a strategic investor for its life insurance unit ahead of a possible initial public offering.

"Nippon Life will bring vast experience in areas of product development, underwriting, investment management, distribution, customer relationship management and risk management," Sam Ghosh, chief executive of Reliance Capital, said in a statement.

Life insurance penetration in India is about 4 percent of the gross domestic product, in terms of total premiums underwritten in a year, compared with 2.4 percent in China and about 13.5 percent in Britain.

Industry executives say the outlook remains bright in an under-insured, booming economy that is expected to grow at 8.6 percent in the current fiscal year ending in March.

The stake sale in Reliance Life may give a boost to sentiment towards companies in Ambani's Reliance ADA Group, some of which are among the worst performing stocks in the benchmark market index this year, analysts said.