Despite the uncertain and volatile stock markets, shares of public sector banks, if available either as a fresh issue or through an offer for sale, are likely to be snapped up by investors, according to market watchers.

Over the next year or so, the equity markets are expected to be awash with stocks of public sector banks, as the Central government, the majority owner of the banks, will be either offloading shares through offers for sale or the banks will be raising capital, most likely through qualified institutional placements.

The government holds 79 to over 90 per cent stake in banks such as Bank of India, UCO Bank, Bank of Maharashtra, Indian Overseas Bank and Punjab & Sind Bank. It has until August 2026 to reduce its stake in the banks to 75 per cent in order to comply with the minimum public shareholding norms.

Earlier this week the Department of Investment and Public Asset Management (DIPAM) invited applications from prospective investment bankers to advise it on selling stakes in banks and financial institutions.

‘Diluting stakes’

“The Indian government has several options to dilute its stake in public sector banks beyond the OFS. One such method is QIP, which involves raising funds from institutional investors like mutual funds, insurance companies, pension funds and banking and financial institutions. This route has been successfully used by banks like Bank of Maharashtra to reduce government stake,” said Raghvendra Nath, MD, Ladderup Wealth Management.

The Nifty PSU Bank Index has fallen steeply over a one-year period to 5800-levels from 7000-levels in February last year.

When asked whether this was the right time to go for an OFS or an issue, a partner at a corporate law firm said, “The answer to that would be ‘yes’.” He pointed out that despite the huge correction that the equity market is seeing, the “IPO market is so hot even right now that people are willing to pay money.” He added, “I don’t think there’s a better time to hive off.”

The size of the divestment would also have to be big in order for it to get a good reception. “Small ticket sizes won’t work. It has to be big ticket,” the lawyer said.

As far as the banks themselves are concerned they need growth capital as deposit growth continues to lag credit growth with savers gravitating towards alternative investment avenues such as equities, mutual funds and bonds for better returns.