Temasek Holdings is selling its majority stake in Indonesia's Bank Danamon to Japan's largest lender Mitsubishi UFJ Financial Group (MUFG).

MUFG will acquire Temasek's 73.8 per cent stake in Danamon in three parts, with an initial acquisition of a 19.9 per cent stake at 8,323 Indonesian rupiah apiece, or 15.875 trillion Indonesian rupiah (S$1.5 billion).

It will seek further regulatory and relevant approvals to buy an additional 20.1 per cent to raise its stake to 40 per cent.

Eventually, it will seek the needed approvals to lift its stake beyond 40 per cent, a stipulated ceiling that previously stymied DBS Group Holdings' ambition.

In 2013, DBS tried to buy a controlling stake in Danamon. But it was thwarted after Indonesia changed its laws to restrict single ownership in banks to 40 per cent.

Indonesia, however, can relax the ceiling on special grounds, like the investing bank being financially strong.

Acknowledging the deal, Temasek president and head of South-east Asia Tan Chong Lee said yesterday that MUFG is well positioned to complement Danamon's franchise, which is strong in corporate lending and infrastructure financing, and lead the bank into its next growth phase.

"We believe MUFG's interest in Danamon is testament to its confidence in the bank and that the combination will also be well aligned with Indonesia's development and growth objectives," he noted.