On Tuesday, February 25, several public sector undertaking (PSU) bank stocks, including IDBI Bank, Central Bank of India, Indian Overseas Bank (IOB), UCO Bank, and the Bank of Maharashtra, witnessed notable gains during the morning trading session. This uptick came despite a generally weak performance across the broader market, driven by renewed optimism surrounding potential divestment plans.
The positive sentiment among investors was fueled by fresh reports indicating that the Department of Investment and Public Asset Management (DIPAM) had taken a significant step forward in the government’s broader divestment strategy. According to a report from PTI, DIPAM officially invited bids from merchant bankers and legal firms on Monday. These bids are intended to help facilitate the government’s efforts to divest its stake in various public sector banks and listed financial institutions.
This move signals the government’s ongoing commitment to reducing its shareholding in state-owned banks, potentially paving the way for increased private sector participation and improved operational efficiencies within these institutions. The development sparked a positive reaction from market participants, pushing up the share prices of these PSU banks, even as the overall market remained subdued.
According to the PTI report, the Department of Investment and Public Asset Management (DIPAM) has issued two separate Requests for Proposal (RFPs) aimed at empanelling merchant bankers and legal advisors to assist in the government’s divestment efforts. These professionals will be appointed for an initial term of three years, with the possibility of extending the tenure by an additional year if required. The report also mentioned that the deadline for merchant bankers to submit their bids is March 27, 2025.
This development comes as part of the government’s broader strategy to bring public sector banks in line with market regulations. Currently, five PSU banks have yet to meet the minimum 25% public shareholding requirement set by the Securities and Exchange Board of India (SEBI). This norm is designed to ensure adequate public participation and improve market liquidity in these financial institutions.
The government still holds a significant majority stake in several PSU banks, including:
• 98.3% in Punjab & Sind Bank
• 96.4% in Indian Overseas Bank (IOB)
• 95.4% in UCO Bank
• 93.1% in Central Bank of India
• 86.5% in Bank of Maharashtra
To comply with SEBI’s mandate, these banks are required to increase their public shareholding by reducing the government’s stake. The government has set a deadline of August 1, 2026, for these institutions to meet the minimum public float requirements. This initiative reflects the government’s ongoing efforts to promote greater transparency, enhance corporate governance, and boost investor confidence in the public banking sector.
In addition to its significant holdings in public sector banks, the government also maintains substantial stakes in several key financial institutions. Currently, it holds an 86.36% stake in the Indian Railway Finance Corporation (IRFC), which plays a vital role in financing the expansion and modernization of the Indian Railways.
Similarly, the government owns 85.44% of New India Assurance, one of the country’s leading general insurance providers, known for offering a wide range of insurance products across various sectors.
Additionally, the government holds an 82.40% stake in the General Insurance Corporation (GIC), India’s largest reinsurer, which provides reinsurance solutions both domestically and internationally.
These significant holdings reflect the government’s continued influence in the financial sector, and any reduction in its stakes would be part of broader efforts to encourage greater public participation, improve market efficiency, and align with regulatory norms aimed at enhancing transparency and corporate governance.
Over the past year, a majority of public sector undertaking (PSU) bank stocks have experienced significant declines in value. This downward trend has been reflected across almost all the constituents of the Nifty PSU Bank Index, with most stocks remaining in negative territory during this period.
Among the hardest-hit banks, UCO Bank has witnessed a steep decline, with its shares falling by over 35% in the last year. Similarly, shares of both Punjab & Sind Bank and Indian Overseas Bank (IOB) have also faced substantial losses, each dropping by more than 30% over the same timeframe.
Other major PSU banks have also been affected, though to a slightly lesser extent. Shares of Central Bank of India, Punjab National Bank (PNB), Bank of India, Canara Bank, Bank of Baroda, and Union Bank of India have recorded declines ranging between 20% and 30% during this period.
This broad-based decline highlights the challenges faced by the public sector banking segment, influenced by factors such as market volatility, regulatory pressures, and concerns over asset quality and profitability.
Several factors have contributed to the underperformance of public sector undertaking (PSU) banking stocks over the past year. One of the primary reasons has been the release of weak quarterly financial results, with many PSU banks reporting lower-than-expected earnings, declining profitability, or muted growth in key financial metrics such as net interest income and asset quality.
Another significant factor weighing down these stocks is their stretched valuations. Despite relatively modest growth prospects, the market valuations of some PSU banks have remained high, making them less attractive to investors compared to their peers in the private sector. This disconnect between performance and valuation has led to reduced investor confidence.
Additionally, PSU banks have been steadily losing market share to their larger private sector counterparts. Private banks have gained a competitive edge by offering better customer service, more efficient digital banking solutions, and innovative financial products. This shift has further eroded the market position of PSU banks, adding downward pressure on their stock prices.
Together, these factors have contributed to the persistent weakness in PSU banking stocks over the last year, despite broader trends in the financial sector.