The Centre is contemplating a reduction of its shareholding in four public sector banks—Central Bank of India, UCO Bank, Punjab & Sind Bank, and Indian Overseas Bank—to 75% within the next year. This move aims to comply with the minimum public shareholding requirement set by the Securities and Exchange Board of India (Sebi), as reported by The Economic Times. The government is also preparing for a potential consolidation of public sector banks, which may identify additional candidates for privatisation.

The proposed reduction in stake is expected to enhance the availability of shares for public investors in these banks. The government may consider selling portions of its holdings through the offer-for-sale (OFS) mechanism, contingent on prevailing market conditions. Additionally, the banks themselves could explore raising funds through the market based on their respective strategies.

An official stated that the initial focus is on increasing public shareholding in these four banks within the year. The official indicated that the government’s stake would be offloaded through the OFS route, depending on market circumstances. This increased public float is anticipated to positively influence the banks’ valuations.

Current Shareholding Status

The government currently holds significant stakes in these banks, with 92.44% in Indian Overseas Bank, 81.19% in Central Bank of India, 90.95% in UCO Bank, and 93.85% in Punjab & Sind Bank. Reducing the government’s stake to 75% would necessitate a larger sell-off in Indian Overseas Bank, UCO Bank, and Punjab & Sind Bank compared to Central Bank of India. The specifics regarding the size and timing of any share sale will depend on market dynamics and governmental decisions.

It is noteworthy that the government had previously exempted state-run entities, including financial institutions, from meeting the minimum public shareholding requirement of 25% until August 2026. An extension of this exemption is anticipated, according to the report. The planned stake sales will enhance the public float in these banks, aligning them closer to the ownership norms established by the market regulator.

In addition to the stake sales, the government is exploring a broader strategy for the consolidation of public sector banks, aiming to maintain three or four large state-owned banks in the long term. Reports suggest that NITI Aayog has shortlisted Central Bank of India and Indian Overseas Bank as potential candidates for privatisation, although no final decision has been made regarding their privatisation.

Legislative Considerations for Privatisation

The government’s plans for consolidation will consider various factors, including technological compatibility, geographical distribution, and the business mix of the banks involved. Officials have indicated that the banks themselves will be encouraged to provide input during this process. Any move towards privatisation will necessitate amendments to existing legislation, such as the Banking Companies (Acquisition and Transfer of Undertakings) Act.

These legislative changes may be pursued concurrently with the consolidation efforts, as indicated by an official source. In the 2021-22 Union Budget, the government had previously announced intentions to privatise two public sector banks and one general insurance company, in addition to IDBI Bank.

Recently, the government disclosed that Fairfax Financial Holdings, led by Canadian billionaire Prem Watsa, would acquire a 60.72% stake in IDBI Bank for Rs 52,878 crore. This transaction is part of the government’s broader strategy to decrease its ownership in state-linked financial institutions and attract private capital. However, the proposed stake sales in the four public sector banks primarily aim to increase public shareholding and fulfil market requirements, rather than signalling an immediate decision to privatise these lenders.

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