India and Singapore signed a free-trade agreement last year which set a 10 percent investment limit for Singapore firms in listed Indian companies. Under central bank rules the normal investment cap for foreign financial institutions or banks in Indian banks is 5 percent.

Singapore investment group Temasek, which is owned by the finance ministry and state investment arm the Government of Singapore Investment Corporation (GIC), can hold up to 10 percent each in Indian listed firms under the free-trade treaty.

ICICI Bank, India's largest private sector bank, says Temasek, through its unit Allamanda Investments, holds a 7.57 percent stake and GIC holds another 1.57 percent. Both Temasek and GIC want to raise their stakes to 10 percent.

"The Reserve Bank of India (RBI) has taken a position that both Temasek and the Government of Singapore Investment Corporation are owned by the Singapore government," one source said. "The combined stake in the bank would cross the 10 percent limit allowed in a private bank."

Central bank officials were unavailable for comment. Temasek said it had no comment on market speculation.

India's financial sector is dominated by state-run banks, which control about 75 percent of the assets. Private banks account for 18 percent of the sector's assets, while foreign, cooperative and regional banks hold the rest.

Foreign portfolio investors together cannot buy more than 20 percent of a state-run bank, while investment by a single foreign company in a private bank must not exceed 5 percent. The stake can be raised to 10 percent with central bank permission.

Foreigners are eager to enter the tightly regulated industry to benefit from rapid growth in consumer lending in an economy expanding at 8 percent a year, but the central bank is wary of letting them in.

In February, HSBC Holdings Plc. trimmed its stake in UTI Bank to 4.99 percent, selling 7.2 percent for $142 million to comply with central bank rules.

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