Shares of Indian Bank, Punjab National Bank (PNB), and other public sector undertaking (PSU) banks experienced a decline of up to 3.5% on Wednesday, December 3, 2025, following clarification from the Ministry of Finance that there is no proposal to increase the foreign direct investment (FDI) limit in these banks. The stocks had previously seen gains based on reports of a potential increase in the FDI limit.

Minister of State for Finance Pankaj Chaudhary addressed the Rajya Sabha on Tuesday, stating that the government is not considering raising the FDI limit in PSU banks to 49% from the current 20%. This clarification ended speculation about a possible liberalization of foreign investment rules for public sector banks.

Current FDI Norms

The existing regulations stipulate an FDI limit of 20% for PSBs and 74% for private sector banks. Foreign investment in private banks is permitted up to 49% through the automatic route, while investments exceeding 49% and up to 74% require government approval.

RBI Guidelines

The Reserve Bank of India (RBI) mandates that any acquisition of shares in a bank resulting in an individual or entity controlling 5% or more of the bank's paid-up capital requires prior approval from the RBI. This regulation is outlined in the RBI's Master Directions on 'Acquisition and Holding of Shares or Voting Rights in Banking Companies'.

Government Shareholding

Chaudhary also addressed concerns about the government's stake in PSU banks, stating that the number of shares held by the Union Government in 12 PSBs has not decreased since 2020. However, the percentage of government shareholding has decreased in some banks due to the issuance of fresh shares to raise capital for business growth and to meet regulatory compliance. The issuance of new shares helps to strengthen bank balance sheets and reduce the fiscal burden on the government. Banks are also required to comply with the minimum public shareholding requirement of 25% under SEBI regulations.

Atmanirbhar Bharat Policy

Under the Public Sector Enterprises (PSE) policy for Atmanirbhar Bharat, NITI Aayog will provide strategic recommendations regarding central PSEs, including banking, insurance, and financial services. Decisions regarding government control, privatization, mergers, or subsidiarization will be approved by an Alternative Mechanism authorized by the government.

Market Impact and Analysis

The clarification from the Finance Ministry led to a negative impact on the NIFTY PSU Bank index, which traded over 1% lower, with all components in the red. While most PSU bank stocks recorded gains following earlier reports of a potential FDI limit hike, some, including Punjab National Bank (PNB), retreated from their intraday highs and closed in the red.

Analysts suggest that increasing the FDI limit could attract greater foreign capital into the banking sector, strengthen the balance sheets of state-run lenders, improve liquidity, and support their role in economic growth.