If you own a bank share, you own a percentage of that bank and of the profits of that bank. If additional shareholders are brought in for any reason, in such a manner that they share the profits and/or the ownership, then your percentage of the profit is smaller. It is diluted.
In a situation where business is growing, and the bringing in of extra capital boosts profits, then you will not notice the dilution, but if extra capital has to be brought in to support a company where profits are falling, then the effect is very noticable. Your dividends will likely be below expectation.
Govt cannot decide that any two banks must merge. Only the shareholders can do that.... But individual shareholders actually have little influence, because even all of their combined shareholdings are miniscule compared with the shareholdings of the institutional shareholders. They will make the decisions - possibly within the framework of discussions with government.