Also, ING, which holds a 44 per cent stake in ING Vysya Bank, will not be required to divest its stake to 5 per cent in the bank, following the Reserve Bank of India's proposed norms for ownership and governance in private banks. However, HSBC will be required to pare its 14.5 per cent stake in UTI Bank.

A Reserve Bank of India spokesperson refused to comment on specific banks, but referred to a section of the draft guidelines, which read, "where the ownership is that of a financial entity, the objective will be to ensure that it is a widely held entity, publicly-listed and a well-established regulated financial entity in good standing in the financial community."

ING surrendered its own licence and merged itself with Vysya Bank. Everything was done in a transparent manner with the central bank's permission. There is no case for ING paring its stake in the bank, sources said.

This essentially means that even foreign banks, which have been operating in India, will be able to take over a private bank and merge it with itself. In fact, the RBI proposal to increase the net worth of old private banks to Rs 300 crore (Rs 3 billion), on par with new private banks, will trigger large-scale mergers and acquisitions among the older private banks.

In the interest of diversifying the ownership of banks, the RBI will not allow any single entity or group to hold more than 10 per cent stake in a private bank.

However, a higher level of equity can be acquired with the prior approval of the central bank. The rule will also be relaxed if the entity itself is widely held, like ICICI Bank and Housing Development Finance Corporation.

The government has given foreign banks operating in India two options -- either they can locally incorporate themselves and become a subsidiary of the foreign entity, or continue to function as a branch of the foreign entity.

Once they decide on their role in India, they will be allowed to take over private banks and merge these with themseles, provided they match the RBI criteria for fitness and propriety.

On top of the central bank's priority list, is protection of the depositors' interest. Besides, if a foreign bank explores inorganic growth through acquisitions and the target private bank is in need of capital, the central bank will allow such acquisitions.

"It seems that the regulator wants to put in place a transparent policy. If the acquirer can convince the Reserve Bank that the acquisition is in the interests of both parties, there should not be any problem in the deal," said a banking sector analyst.

Commenting on the draft, a Reserve Bank of India official said, "The central bank has laid the path for the future. However, the means to achieve the path is negotiable."

The central bank has sought suggestions on the draft policy framework for ownership and governance of private banks. Based on the feedback, it will place a second draft of the policy in the public domain for further debate, the official added.