MUMBAI: India's capital market regulator said the government should dilute its stake in listed public-sector companies over the next three years and cap it at 75 percent, a recommendation if taken would lead to at least $10 billion worth of share sales.

The recommendation was one of several drawn up by the board of the regulator following its first meeting after the pro-business government led by Prime Minister Narendra Modi came to power.

The share offerings would help draw further investor interest in an equity market that has recently risen to record highs following Modi's landslide election victory last month.

Modi, who won largely on his promise of boosting economic growth, is expected to speed up government stake divestments to bolster revenue generation in Asia's third-largest economy.

"There will be a lot of demand from foreign investors for these issues," said Naveneet Munot, Chief Investment Officer at SBI funds management in Mumbai. "This would be a good way to generate investor interest in India as the world is watching the new government's every move."

The government owns stakes of as much as 90 percent in some listed public-sector companies including Coal India Ltd , the world's largest coal miner, and trading company MMTC Ltd., according to the stock exchange data.

The Bombay Stock Exchange's PSU index, which comprises state-controlled companies, is up nearly 15 percent since Modi came to power, outperforming a 5.4 percent gain for the main stock index.

"The sentiment for a lot of these PSU stocks is changing very rapidly. People believe that under the new government these companies can turn around through improvements in efficiency and management," said Atul Kumar, chief investment officer at Quantum Asset Management.

In India, listed state-controlled companies are required to have at least 10 percent public shareholding. Non-state companies were told by the Securities and Exchange Board of India (SEBI) last year to raise the public shareholding cap to 25 percent.