Govt May Consider Both OFS and QIP Routes for Stake Dilution
The Union government is preparing a road map to dilute up to 20% of its stake in five public-sector banks (PSBs) over the next four years. This move, being developed in consultation with the Department of Investment and Public Asset Management (DIPAM), the Department of Financial Services (DFS), and state-run banks, aims to align with the Securities and Exchange Board of India’s (SEBI) minimum public shareholding norms, according to a senior government official.
“This will be done while considering market conditions, using both the offer for sale (OFS) and qualified institutional placement (QIP) routes for stake dilution,” the official stated.
Banks Targeted for Stake Dilution
The five banks where the government plans to reduce its stake below 75% are:
- Bank of Maharashtra – Current government holding 86.46%
- Indian Overseas Bank – 96.38%
- UCO Bank – 95.39%
- Central Bank of India – 93.08%
- Punjab and Sind Bank – 98.25%
SEBI mandates a minimum 25% public shareholding in listed firms. While state-owned banks were given an August 2026 deadline to comply, the government is now moving forward with its stake dilution plans.
Stake Sale Strategy: OFS vs QIP
In a Qualified Institutional Placement (QIP), new shares are issued, and the raised funds go directly to the company. In contrast, an Offer for Sale (OFS) allows the government to sell its existing shares, raising funds for other financial needs.
The government is primarily considering the OFS route, as PSBs are already well-capitalized.
“PSBs have recovered well, and through OFS, the government can raise funds for other needs,” the official added.
Government’s Surplus Stake and Market Impact
Sanjay Agarwal, Senior Director at CareEdge Ratings, highlighted that during the post-Asset Quality Review (AQR) period, the government had infused substantial equity to support PSBs amid credit losses. With PSBs now generating strong profits, the government holds a significant surplus equity stake worth over ₹43,000 crore at current valuations.
This surplus stake may be used to fuel bank growth, while the remaining equity could be sold in secondary markets.
Capital Raising by PSBs
- In FY25, two PSBs raised ₹8,500 crore:
- Bank of Maharashtra – ₹3,500 crore
- Punjab National Bank – ₹5,000 crore
- In FY24, five PSBs raised ₹17,500 crore through QIP:
- Bank of India – ₹4,500 crore
- Bank of Maharashtra – ₹1,000 crore
- Indian Bank – ₹4,000 crore
- Union Bank of India – ₹8,000 crore
Notably, no PSB has raised capital via OFS in the last two financial years.
Government Initiates Process for Stake Sale
On Monday, the government officially started the dilution process in select PSBs and public financial institutions (PFIs) by inviting bids from merchant bankers and legal advisors. DIPAM has issued a request for proposal (RFP) for transaction advisors, offering a three-year contract with an optional one-year extension.
This move aligns with the privatization roadmap outlined by Union Finance Minister Nirmala Sitharaman in her 2021-22 Budget, where she announced plans to privatize two PSBs and IDBI Bank.
With the clock ticking towards the 2026 SEBI deadline, the government’s stake dilution strategy could reshape India’s banking sector and influence market sentiment.
