The government shareholding in many state-run banks is currently above 75 per cent.

The government proposes to bring down its holding in state-owned banks by launching an exclusive PSU Banks ETF (Exchange Traded Fund), sometime at the end of the third quarter period of the current financial year, sources said.

Official sources said that a proposal to set up PSU bank ETF has found favour with both Department of Financial Services (DFS) and DIPAM, and that a formal plan would be prepared after the new government takes office at the centre.

Government holding in several PSU banks continues to remain at very high levels. It is as high as 75 per cent in Punjab National Bank (PNB) and 65 per cent in Bank of Baroda. This is despite market regulator Sebi directing higher public holding in listed entities, including banks, and the finance ministry being in favour to bring down government holding in banks to 52 per cent.

Finance ministry officials said the long overdue PSU bank ETF will solve the dual purpose of raising resources for the disinvestment department and help it meet the Rs 90,000-crore target and also help in paring government's stake in PSU banks post-recapitalisation.

It is proposed that initially all the top 10 banks would be part of PSU Bank ETF to help the fund generate interest among the investors. Subsequently, smaller banks would be added. But before that, the balance sheet of these banks need to be strong to gain investor confidence.

The reduction of government stake in PSU banks to 52 per cent is not only on agenda of the government for the last five years, it is also required to meet the market regulator Sebi's mandate of meeting a minimum 25 per cent public float. With repeated recapitalisation due to the poor capital strength of the banks, the government stakes keep on reaching new highs.

With the new government at the centre, it is expected that they would fulfil their own agenda of bringing down its stake in PSU banks. With market conditions not in the hands of banks, the stake sale of these banks many times perpetually get delayed. The Bank ETF would solve that purpose, said the sources.

But at the moment it is not decided if the insurance companies will be part of it. Among the PSU banks, 19 of them are listed.

The government shareholding in many state-run banks is currently above 75 per cent. In case of their further recapitalisation, this will go up over 90 per cent in some cases and also touch 99 per cent.

The country's largest lender, State Bank of India, has already initiated steps for Rs 20,000 crore share sale through qualified institutional placement (QIP). Post QIP, the government stake will be diluted from the existing 58.53 per cent.

Many other banks are planning to raise capital through some means or other, depending on the market conditions. Some state-run lenders such as Syndicate Bank, Union Bank of India, PNB, and Oriental Bank of Commerce, among others, have already issued, or are in the process of announcing Employee Share Purchase Schemes (ESPS).

The government shareholding in PNB is 75.41 per cent and 89.1 per cent in Bank of India. In the merged entity of Bank of Baroda-Dena-Vijaya Bank, the government's stake is 65.7 per cent on the basis of the share-swap ratio.