The finance ministry is exploring the possibility of using public offers to sell government stake in nationalised banks. This is a departure from the government's current practice of diluting its stake in banks only through fresh issue of shares.

Government officials said the matter had been referred to the law ministry since there was a lack of clarity on the provisions of the Banking Regulation Act and the Bank Nationalisation Act.

The government could unlock up to Rs 3,000 crore (Rs 30 billion) by offloading its stake through this route. Officials, however, said no decision had yet been taken on the matter and discussions were purely exploratory.

The model to be followed is the one adopted for the National Thermal Power Corporation's initial public offer where the government sold 433 million shares in addition to a fresh issue of an equivalent number of shares.

While banking experts feel the law does not permit transfer of shares, a section within the finance ministry says the law does not bar the government from selling its shares to the public.

Nationalised banks like Dena Bank, Punjab National Bank, Bank of Baroda, Central Bank of India and Indian Bank are planning public offers. Other public sector banks are queuing up with their offers as the deadline for Basel II norms nears.

While the government holding in Dena Bank will come down to 51 per cent after the public offer, the government will have sufficient headroom to sell its stake in other banks.

The government will need to amend the law to reduce the prescribed floor for the government's holding to below 51 per cent if it intends to dilute its holdings in banks like the Dena Bank.

"Even if the government does not allow transfers, the law needs to be amended to ensure that banks can grow at the pace they want since you need funds to keep step with growth," said a banker.

Officials, however, said that the UPA government was not keen on changing the public sector character at the moment. Divestment of government stake in nationalised banks has not been dealt with and the divestment department's mandate does not cover it.