WHAT?

The Indian government is accelerating its disinvestment drive by planning to sell up to 20% stake in five public sector banks (PSBs) within the next six months, utilizing Qualified Institutional Placement (QIP) and Offer for Sale (OFS) routes. This move aims to raise capital, improve bank governance, and ensure compliance with the Securities and Exchange Board of India’s (SEBI) minimum public shareholding (MPS) norm of 25%.

The initiative is part of a broader strategy to strengthen the financial health of PSBs and support economic growth while addressing fiscal constraints. 

Key Details of the Disinvestment Plan 

The government aims to reduce its stake in each bank by up to 20%, bringing its shareholding below 75% in a phased manner to comply with SEBI’s MPS norm, which mandates a minimum 25% public shareholding for listed companies. The five PSBs identified for stake sale are:

Methods of Disinvestment

1. Qualified Institutional Placement (QIP): Involves issuing fresh equity shares to institutional investors, diluting government stake while raising capital for the banks.
2. Offer for Sale (OFS): Involves selling existing government-held shares directly in the stock market, typically to institutional and retail investors, with a set floor price.
3. Timeline: The stake sales are planned to be completed within six months (by December 2025), with merchant banker appointments in the final stages to facilitate the process.

Objectives

1. Capital Infusion: Proceeds will strengthen the banks’ capital base, enabling them to meet Basel III norms and support credit growth, especially for MSMEs and retail sectors.
2. Governance Improvement: Reducing government control is expected to enhance operational efficiency and decision-making autonomy.
3. Fiscal Support: The funds will contribute to the government’s disinvestment target, helping manage fiscal deficits amid uncertain tax revenues.

Context and Background

1. Historical Precedent: The government has been reducing its stake in PSBs to meet SEBI’s MPS norm and recapitalize banks. In 2017, eight PSBs with government stakes above 75% (including the five named above) were prioritized for stake dilution to raise funds and comply with the 25% public-float norm by August 2018. The Indradhanush Plan (2015-2019) allocated ₹70,000 crore for PSB recapitalization, partly funded through stake sales.
2. Recent Developments: In February 2025, the Department of Investment and Public Asset Management (DIPAM) invited bids from merchant bankers to assist in minority stake sales in PSBs and financial institutions like Life Insurance Corporation (LIC) over three years, indicating a long-term disinvestment strategy. The last date for bids was March 27, 2025, with empanelment for transactions of ₹2,500 crore or more (Category A+) and smaller deals (Category A).
3. Market Response: PSU bank stocks rose up to 4% on June 17, 2025, reflecting investor optimism about improved governance and capital strength. For example, LIC recently increased its stake in Bank of Maharashtra from 4.05% to 7.10% via QIP in October 2024, signaling market confidence in PSB growth potential.

PAST SALE OR DISINVESTMENT

1. NTPC (2018): 3-5% stake sale via OFS to raise ₹3,500-6,000 crore.
2. HAL (2023): 3.5% stake sale via OFS to raise ₹2,867 crore.
3. ONGC (2022): 1.5% stake sale via OFS for ₹3,000 crore.
4. The 2020-21 disinvestment target was ₹2.1 lakh crore, with ₹1.2 lakh crore from PSUs and ₹90,000 crore from financial institutions like LIC and IDBI Bank.
5. Policy Framework: Finance Minister Nirmala Sitharaman’s 2021-22 Budget announced the privatization of two PSBs (besides IDBI Bank), with a focus on strategic disinvestment and asset monetization to raise ₹1.75 lakh crore. The National Asset Monetization Pipeline aims to boost fiscal space through PSU stake sales and infrastructure monetization.

Strategic and Economic Implications

1. Strengthening PSBs: The stake sale proceeds will enhance banks’ capital adequacy ratios, crucial for lending growth amid rising credit demand (bank credit to NBFCs slowed to a four-year low in 2024). This aligns with India’s financial inclusion goals, such as Jan Dhan Yojana and UPI expansion.
2. Fiscal Relief: The disinvestment will help meet fiscal deficit targets (budgeted at 4.9% of GDP for FY25), especially with direct tax collections exceeding targets (₹12.31 trillion by January 2025, 86.68% of Budget estimates).
3. Market and Investor Confidence: Reducing government stakes below 75% aligns with SEBI’s MPS norm, broadening the investor base and potentially including PSBs in benchmark indices like BSE Sensex or Nifty 50, similar to LIC’s inclusion strategy.