Shares in Indian private banks dropped between 2 and 13 percent on Monday in the wake of draft central bank rules to cap private bank ownership.
ICICI Bank Ltd, India's second-largest commercial bank, said it would lower its stake in Federal Bank from above 20 percent, in line with the RBI's draft, though some analysts thought this was premature.
Another potential casualty, Britain's HSBC, which only last month finalised the purchase of a 15 percent stake in UTI Bank, said it was studying the proposals.
On Friday, the Reserve Bank of India (RBI) issued guidelines proposing that no individual or related group could hold more than 10 percent of a private bank's paid-up capital.
Foreign banks already in India would not be able to hold more than 5 percent in a private bank. Also, private banks would not be allowed to hold more than a 5 percent stake in each other.
The RBI has asked for feedback on its draft and has issued no timetable for any new rules to be implemented.
Some analysts said the proposed caps on ownership would deter strategic investors and delay much-needed consolidation in a fragmented banking sector where as many as 21 old private banks jostle with nine newer generation banks.
Others said such a move could, however, prompt a wave of mergers between smaller banks.
"These moves are clearly aimed at ensuring wide ownership in a strategic sector," said Kalpana Morparia, Deputy Managing Director at
"I do not think this will impede consolidation, instead it could encourage smaller banks to come together, maybe through stock swaps, as this will help them meet the net worth requirements as well as dilute ownership," she added.