Government PSU Stake Sales Of ₹6.6 Lakh Crore May Ease FPI Selling

The government could raise around ₹6.6 lakh crore by reducing its holdings in listed public sector companies by 15% over the next three years. The sales would also add more shares to the public market and give the government a source of non-tax revenue.

The proposal comes as foreign investment continues to flow out of India. Domestic investors have taken up much of the supply so far.

How Could PSU Stake Sales Change The Equity Market?

The government currently holds around ₹44 trillion worth of listed companies, according to sources. That is nearly four times the pre-pandemic level. Banks and non-banking financial companies account for a sizeable share of these holdings.

Part of these holdings could move into the public market through stake sales. That would raise the free float of companies where government ownership remains high.

A larger public float would give foreign investors more room to build positions in listed companies. The proposal does not assume that stake sales would automatically bring fresh foreign money into Indian equities. Instead, the additional supply could help address the mismatch between strong domestic demand and the relatively limited supply of investable shares.

Why Have Foreign Investors Been Selling Indian Equities?

Expensive valuations and weaker-than-expected earnings growth have weighed on foreign investor flows, according to the sources.

India’s average valuation premium over global equities stood at 12% over the past 14 years, compared with an 8% premium before Covid. When earnings fail to keep pace with valuations, foreign investors may find other markets more attractive on a risk-adjusted basis.

Global factors can also influence the direction of these flows. Movements in the dollar and US bond yields, along with changes in global risk appetite, can affect allocations to emerging markets.

Foreign flows have remained volatile in recent months. Foreign portfolio investors (FPIs) returned as strong buyers in July and August, before selling resumed in September.

Domestic investors, meanwhile, have continued to channel money into equities through systematic investment plans, mutual funds, and insurance companies. Their buying has helped absorb a large part of the shares sold by FPIs.

That has supported Indian equities during periods of heavy foreign selling, but it has also allowed overseas investors to exit without a sharper market correction.

Can Divestment Also Help The Government’s Fiscal Position?

Faster stake sales could serve a second purpose by generating non-tax revenue for the government.

The government could face an income tax shortfall of around ₹762 billion in FY27 if collections grow by 12% instead of the implied 18%, according to the report. Higher subsidy spending could add to the pressure, while fiscal risks may continue into FY28 with the implementation of the 8th Pay Commission.

Closing such gaps entirely through expenditure cuts could affect growth if productive spending is reduced. Selling part of the government’s listed holdings offers another route to raise revenue without relying only on higher taxes or lower spending.

The government has already achieved around 70% of its FY27 divestment target in the first five months, largely helped by the LIC offer for sale. The proposed IDBI Bank stake sale is also in the pipeline.

A sustained programme could therefore have a broader impact than individual transactions. Foreign investors would still respond to earnings, valuations, interest-rate differentials, currency movements and global risk appetite. But a larger pool of investable shares could give the market greater capacity to accommodate both domestic and foreign capital.

For the government, the same programme could provide additional non-tax receipts and support fiscal targets.

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