The finance ministry is expected to soon seek cabinet approval for amendments to the Banking Regulation Act, 1949, and possibly other legislation as it kickstarts the process to privatise two state-run lenders. The proposed changes could include the removal of the 20% foreign investment cap applicable to public sector banks in these two cases, a senior government official told ET. A more attractive voluntary retirement scheme (VRS) for employees of these two banks may also be proposed to the cabinet.

Inter-ministerial consultations have been completed on a draft cabinet note on the proposed amendments. “We have incorporated the relevant suggestions and a final proposal will soon be put for final consideration and approval of the cabinet,” the official said.

Finance minister Nirmala Sitharaman had in her budget speech last year announced privatisation of two state-run banks as part of the government’s disinvestment programme without naming any lenders. Subsequently, in April 2021, the NITI Aayog had shortlisted two banks without identifying them.

Reports suggest that these are Central Bank of India and Indian Overseas Bank.

The government is likely to retain at least 26% of the lenders for the first few years. The extent of the stake sale will depend on interest from investors and market conditions. Foreign investment is limited to 20% in public sector banks under the Banking Companies (Acquisition & Transfer of Undertakings) Acts 1970/80. A higher threshold will make these banks more attractive to investors. This will require amendment to the latter as well as incidental changes to the Banking Regulation Act.

That won’t be needed for the separate plan to divest stakes in IDBI Bank. “These changes are not needed in IDBI Bank as it was set up under the Companies Act,” said the official cited above. Plans are also underway to invite expressions of interest for the stake sale in IDBI Bank, in which the government and LIC own 45.48% and 49.24%, respectively.

The government had earlier listed the Banking Laws (Amendment) Bill, 2021, in the winter session of parliament to provide the necessary legal framework for privatisation of public sector banks, but it was not moved for consideration, possibly because of the assembly elections in five states. Following victory in four states in the elections, the government is widely expected to press ahead with its reform agenda. Bank unions have opposed the move and sought more public consultation with stakeholders, including workers, before taking any further steps.