The transaction is the largest share sale this year in India and comes close on the heels of investors such as Carlyle paring their stakes in Indian companies after a sharp surge in the domestic markets in 2012.
Analysts said more stake sales via block deals in the stock market are likely to take place in the near future, as buyout firms and strategic investors look to cash in on investments made before the 2008 global financial crisis.
India's main stock market index .BSESN has risen nearly 17 percent so far this year, making it one of the best performing major global markets. The rally has been mainly led by financial stocks.
"The stock market rally since the beginning of this year has opened a window of opportunity for investors to book strong profit on their holdings," Jagannadham Thunuguntla, head of research at SMC Global Securities.
"Many such exits will happen in the next couple of months."
Citigroup has launched the process to sell about 145 million shares, or a 9.9 percent stake, in HDFC for between 630 rupees and 703.55 rupees per share, said the sources, declining to be named as the deal is not public yet.
Shares in India's top mortgage lender HDFC, which has a market value of $21 billion, ended down 0.1 percent at 701.30 rupees in a weak Mumbai market .BSESN ahead of the news.
The lower end of sale price range represents a discount of 10 percent to HFDC's Thursday close.
HDFC Chief Executive Keki Mistry told Reuters the company had been informed about the launch of the deal by Citi, but declined to give details. A spokesman for Citigroup in India declined to comment.
Citi is the sole bookrunner for the deal, the sources said.
The deal will take it to the top of India's equity capital market league table, according to Thomson Reuters data. The bank, which ranked No. 2 in the ECM table in 2011, was not among the top three in the table before this transaction in 2012.
BLOCK DEALS
The exit from HDFC is part of Citi's efforts to boost its capital base to meet new global banking rules, the sources said.
The European debt crisis has interrupted CEO Vikram Pandit's plans to rebuild the bank that reported an 11 percent drop in its latest quarterly profit.
Citi, which had to be bailed out by the U.S. government during the financial crisis, has repaid the bailout investments.
Later this year, the company is also scheduled to satisfy the last $38 billion of obligations guaranteed by the Federal Deposit Insurance Corporation.
Citi, which is the largest shareholder in HDFC, sold a 1.5 percent holding in the lender in June last year in a deal that the bank said would give it a pre-tax profit of $160 million.
The third-largest U.S. bank by assets bought just under 10 percent of HDFC in 2006 for about 29 billion rupees ($589 million) and subsequently added to its stake, to become the lender's top shareholder with a 11.37 percent holding.
Thursday's deal is the fourth large stake sale through stock market deals in India this month.
Singapore state investor Temasek Holdings TEM.UL, Carlyle Group and Warburg Pincus have raised about $740 million by paring their stakes in financial companies in three separate deals earlier this month.
