The Indian government is inclined to retain the voting rights of investors in public-sector banks at 10% even as it is in discussions with the Reserve Bank of India (RBI) to review foreign investment limits in these banks to bring in more capital, two persons aware of the matter said.
The government is mandated to hold a 51% stake in PSBs, with foreign investment capped at 20%. But irrespective of how much an individual or institution holds in a PSB, their voting rights are capped at 10%.
“The voting rights in PSBs may remain at 10% even if the government and regulators decide to raise foreign investment limits beyond 20%. This would retain the government character of these banks, as with limited voting rights, private and foreign investors would not be in a position to impact the management and decision-making powers of bank boards,” said the first person cited above.
Taking no chances
Foreign investment in PSBs is tiny. The top six PSBs had foreign institutional holdings in the range of 4.55% to 11.38% as of 30 June, and almost zero investment from foreign companies or banks. Even individual investors, including mutual funds and corporate bodies, have much less than 10% shareholding in PSBs. Nonetheless, the government is looking to prevent investors from influencing the functioning of PSBs by maintaining the cap on voting rights.
Even in the case of private sector banks, the voting rights of promoters is capped at 26% and financial institutions can hold maximum 15% stake. In these banks, promoters are expected to reduce their stake to 26% in 15 years while shareholding is capped at 10% for individuals and non-financial institutions. The RBI is now reviewing norms on voting rights and shareholding limits in private-sector banks to make the sector more attractive to investors.
“Unlike private banks, PSBs shoulder larger responsibilities and are flag-bearers of the government’s financial inclusion initiatives. A cap on voting rights is essential for PSBs to carry out its social and welfare initiatives,” said a top official of a public sector bank, who did not wish to be named.
The second person cited above said the RBI was reviewing foreign shareholding norms for private banks and that the government would decide on foreign investment limits in PSBs after that. “Changing voting rights has not even come up for discussion, though there have been suggestions to make voting rights proportionate to shareholding,” the person said.
Query sent to the ministry of finance and the RBI remained unanswered.
‘Increase voting rights in phases’
Vivek Iyer, partner and financial services risk leader, Grant Thornton Bharat, said, “With the government’s focus on moving to market-based reforms rather than government funding, PSBs’ need for capital needs to be supplemented with capital sources other than the government. The measure to increase the foreign investment limit of public sector banks addresses this need very effectively. While voting rights need not be increased immediately, a phased approach of increasing voting rights should also be suggested as increased voting rights bring in a higher quality of governance.”
Pratik Shah, partner and national leader – financial fervices, EY India, said, “The Bank Nationalisation Act caps voting rights for all non-government shareholders in PSBs at 10%, ensuring continued government control. To attract strategic, long-term capital and bolster under-capitalised banks, a partial relaxation—coupled with rigorous eligibility and case-by-case screening—could be prudent. As India explores shareholding reforms and has already permitted exceptions in certain cases, gradual, calibrated change seems the balanced path forward.”
“The timing of these reforms seems opportune. With the State Bank of India recently completing a landmark ₹25,000-crore QIP—the largest institutional equity raise in India—investor confidence is clearly strong. As PSBs benefit from enhanced asset quality, greater digital adoption, and anticipated improvements in operational efficiency, long-term global investors are likely to show growing interest in supporting India’s ongoing banking sector transformation,” he added.
The collective net profit of all 12 PSBs hit an all-time high of ₹1.78 trillion in FY25, marking 26% year-on-year growth from ₹1.41 trillion in FY24. The incremental profit stood at ₹37,100 crore compared to the previous fiscal.
On the back of improved performance, PSBs paid a dividend of ₹27,830 crore to shareholders in 2023-24, up 32.7% from ₹20,964 crore in the previous fiscal, according to the government data. For FY25 the dividend is projected to rise further to around ₹35,000 crore.
