The increase, which makes GIC the second largest shareholder in the bank after the United States government, came after it decided last night to convert its US$6.88 billion (S$10.6 billion) investment in preferred shares of the bank to common shares.

The closely watched move followed a day of dramatic developments for the beleagured bank which began when the US government made the first move to convert up to US$25 billion of its own preferred shares to common shares, raising its stake to as much as 36 per cent.

The US government's move was conditional on Citigroup getting other major preferred shareholders to do the same. The bank also agreed to reconstitute its board. CEO Vikram Pandit will stay on.

This precipitated investors like GIC, Saudi Arabia's Prince Alwaleed Talal, Capital Research Global Investors and Capital World Investors into also converting their preferred shares.

The exchange of preferred shares for common shares is aimed at raising what is known as the bank's 'tangible common equity' - a key capital adequacy measurement. It also saves money by cutting dividend payments on the preferred shares, estimated at US$5.5 billion a year in total.

Preferred shares come with a fixed yearly dividend and are usually convertible to common stock at a certain price.

Common shares are the shares that most retail investors buy on stock markets. They pay fluctuating dividends declared yearly by companies.

For GIC, the conversion will mean exchanging its preferred shares for ordinary shares at a much lower price of US$3.25 per share than its original investment in January last year.

The preferred shares were then convertible at US$26.35 per share. This translated roughly to a 4 per cent stake at the time, if the shares were fully converted.

Read the full story in today's edition of The Straits Times.