ICICI Bank Ltds takeover of Bank of Rajasthan Ltd (BoR) will have to clear a new regulatory hurdle before it can be completed, according to a senior official in the industry ministry.

Most banking mergers can move ahead once they get a green signal from the Reserve Bank of India (RBI), but the deal between Indias largest private sector lender and the troubled regional bank will need to be cleared by the government as well because of the provisions of a controversial policy that categorizes ICICI Bank as a foreign-owned one despite its local presence and Indian management.

The merger needs the approval of the FIPB (Foreign Investment Promotion Board) under Press Note 3, an official of the department of industrial policy and promotion, which is responsible for formulating foreign investment policy, told Mint on condition of anonymity.

Under the Press Note 3 of 2009 series, if the ownership of an existing Indian company is transferred to a non-resident entity, as a consequence of transfer of shares to non-resident entities through amalgamation, merger or acquisition, then it would require FIPB approval.

Private sector lenders ICICI Bank and HDFC Bank Ltd were defined as foreign-owned under the new rules since more than half their equity is owned by foreign entities, including foreign institutional investors, who have no board presence or say in company policy.

This regulation is applicable in sectors with foreign direct investment (FDI) caps, such as defence production, private sector banking, broadcasting, commodity exchanges, insurance, print media, telecommunications and satellites,according to the press note.

Any foreign firm trying to gain control of a local company needs the prior approval of FIPB.

A spokesperson for ICICI Bank said the bank would not comment on any issue relating to BoR till the conclusion of its board meeting on 23 May.

The two banks agreed this week to merge in a deal that has met with a cold reception from investors and analysts.

An analyst with a consulting firm, who spoke on condition of anonymity, said either of the banks need to approach FIPB for approval. It does not matter which bank approaches FIPB. One entity can also approach FIPB on behalf of the other, he said.

Under the new regulations, ICICI Bank, with another six banks, has become a foreign-owned lender as overseas entities hold more than 50% of the companys stake. The shareholding of foreign institutional investors in ICICI Bank as on 31 March was 65.30%.

RBI had pointed out that the new norms will create a new set of banks that are owned by foreigners, but controlled by Indians, thus creating a regulatory challenge for the central bank.

However, commerce and industry minister Anand Sharma recently said that no change in the new FDI regulation was needed as it was working just fine.