Indian Oil Corporation, India's largest refiner, will set up an oil exploration subsidiary, which will look for acquiring a medium-sized foreign firm to diversify into the upstream business.

IOC board, which met on Wednesday, gave an in-principle approval to set up the subsidiary with a war chest of $2 billion and sent the proposal to the government for approval.

"(Acquisition of the foreign firm) will help IOC to diversify into oil exploration and achieve faster results than organic growth," IOC chairman M S Ramachandran told PTI in New Delhi.

On IOC's radar are firms like Niko Resources of Canada, Cairn Energy Plc, Tullow Oil and Premier Oil, among others.

IOC aspires to acquire oil and gas fields through the subsidiary to cut dependence on imports to meet its crude oil requirements.

Ramachandran refused to dwell more on the subsidiary, saying the government has to first take a view on it.

The decision to set up an E&P subsidiary is being seen as tough posturing by IOC whose upstream aspirations have remained unfulfilled as the oil ministry sat on its request for accommodating it along with gas firm GAIL in ONGC Videsh Ltd by splitting the country's flagship overseas investment firm.

Alternatively, IOC had proposed for being allowed to set up another overseas firm, with the participation of all public sector oil companies. The new firm was proposed to have equal empowerment in investment decision as enjoyed by OVL.