Shares of India's state-owned banks faced intense selling pressure during Wednesday's trading session, with all 12 public sector lenders witnessing sharp declines. The sell-off was triggered by a government clarification that put an end to recent speculation about a potential increase in the foreign direct investment (FDI) limit for these banks.
Market Reaction and Key Decliners
The sentiment in the banking sector weakened considerably after Minister of State for Finance, Pankaj Chaudhary, stated on Tuesday that the government is not evaluating any plan to raise the FDI limit in public sector banks (PSBs). This statement was made in response to a written question in the Rajya Sabha.
Leading the downturn was Indian Bank, whose shares tumbled by 6% to ₹807 apiece. Other major PSU banks, including Punjab National Bank, Bank of India, Canara Bank, Bank of Baroda, Central Bank, Union Bank, Punjab & Sind Bank, and UCO Bank, also traded lower, with losses of up to 2%.
Reflecting this broad weakness, the Nifty PSU Bank index fell 3% to an intraday low of 8,264. This marked a decline of nearly 5% from its recent high of 8,665, which was reached earlier in November amid the speculation-driven rally.
Speculation Put to Rest
The market correction follows a period of optimism that began earlier in November. At that time, reports had suggested that the government might consider increasing the FDI limit in PSBs to 49% from the current ceiling of 20%. This speculation had fueled a strong rally, pushing the Nifty PSU Bank index to fresh record highs as investors anticipated greater foreign capital inflows.
However, Minister Chaudhary's clear denial has now put those rumours to rest. In his reply, he confirmed that no such proposal is under consideration by the government.
Government Shareholding and Capital Raises
In his responses to parliamentary questions, the Minister provided further context on government ownership in these banks. He stated that the number of shares held by the Union Government in the 12 PSBs has not declined since 2020.
However, he added a crucial detail: although the absolute number of shares held remains unchanged, the government's percentage shareholding has declined in some banks. This dilution is a direct result of the banks raising fresh capital through share issuances to meet business growth needs and regulatory requirements.
Chaudhary explained that such fundraising activities reduce the fiscal burden on the government and help strengthen the banks' balance sheets. He also highlighted that banks must comply with the minimum public shareholding (MPS) requirement of 25%, as per market regulations.
It is important to note the existing FDI framework: while the limit for PSBs is capped at 20%, private-sector banks have a much higher limit of 74%. Within that 74% for private banks, investments up to 49% are permitted through the automatic route, and any investment beyond that threshold requires government approval.
The sharp reversal in PSU bank stocks underscores how sensitive market sentiment can be to policy expectations. With the government's stance now clear, investor focus is likely to shift back to the fundamental performance and asset quality of individual public sector banks.
