The Reserve Bank of India's proposal to cap foreign banks' stake in domestic private banks at 10 per cent has upset HSBC's recent acquisition of a 14.71 per cent stake in UTI Bank.

HSBC never received RBI's formal approval for the deal even though the central bank had given its in-principle approval.

HSBC now has to either pare its stake to 10 per cent or acquire the balance 85.29 per cent stake from existing shareholders in the bank and merge UTI Bank with itself.

As per RBI's draft guidelines, which are yet to be approved by the finance ministry, foreign banks having a presence in India can either acquire 10 per cent in domestic private banks or acquire the entire 100 per cent stake and merge the bank with itself.

In case of foreign banks, which do not have a presence in the country, there is no proposed change in the regulations and they can take up to 74 per cent stake in domestic banks.

Since HSBC is already operational in India it may have to cut down its stake in UTI Bank and abandon its plan to hike its stake to 20.8 per cent. This is because the promoters of UTI Bank are not willing to sell their stakes.

In fact, one of the promoters, Life Insurance Corporation of India, is keen to hike its stake. The country's largest life insurer increased its shareholding in UTI Bank from 4 per cent to 13.5 per cent.

LIC has also indicated interest to acquire the Unit Trust of India's 33.46 per cent holding in its banking arm.

UTI is India's leading public sector mutual fund company and key promoter of the private sector bank. Plans are on the anvil for UTI to divest its strategic holdings in various entities.

LIC, along with the General Insurance Corporation of India, the national reinsurer, and UTI, collectively own about 55 per cent stake in UTI Bank.

HSBC had picked up 14.71 per cent in UTI Bank by buying out part of CDC Capital Partners' stake in the bank.