BENGALURU, Sept 3 (Reuters) - HDFC Life Insurance will buy battery maker Exide Industries' Bengaluru-based life insurance unit for 67 billion rupees ($915 million), strengthening in southern India as it positions for an expansion of the domestic market.

The deal is among the biggest yet in a sector where competition is heating up. India expects to float the initial public offering of dominant state-owned insurer Life Insurance Corp (LIC) this fiscal year.

Only 2.82% of India's 1.3 billion population in 2019, or about 1 in every 35 Indians, had life insurance protection, according to the latest annual report from the country's insurance regulator.

Analysts expect further consolidation as companies jostle for market share and demand for insurance increases amid the COVID-19 pandemic.

Exide Industries' shares surged 15% on the deal news on Friday, before settling 6.4% higher, while HDFC Life closed 3.2% lower.

"India's life insurance industry is heavily fragmented, and with LIC controlling the largest market share, there shouldn't be any antitrust issues for the deal, so it should sail through," said Shriram Subramanian, founder and MD of corporate governance advisory firm InGovern.

HDFC Life, established in 2000 as a joint venture between top mortgage lender HDFC Ltd and Standard Life Aberdeen, controls 8% of the Indian life insurance industry by premiums, versus LIC's 65%, according to latest regulatory data. Exide Life had a 0.34% share.

As part of the deal, HDFC Life will issue 87 million shares to Exide Industries at 685 rupees per share and pay 7.26 billion rupees in cash, HDFC Life said in a regulatory filing.

Exide Life had a customer base of 1.2 million and assets of more than 187.81 billion rupees, as of June 30. The company will be merged with HDFC Life once the deal closes.

Exide Industries, India's largest manufacturer of lead-acid storage batteries, has till date made a total investment of 16.8 billion rupees in its life insurance business.

($1 = 73.0420 Indian rupees) (Reporting by Chris Thomas in Bengaluru; Additional reporting by Gaurav Dogra; Editing by Shounak Dasgupta)