UBS has suffered a serious blow to its hopes of expanding in India after the country’s central bank blocked its $120 million (£60 million) purchase of the local mutual funds unit of Standard Chartered.

The Reserve Bank of India’s unexpected decision has forced UBS, the world’s biggest wealth manager, and Standard to allow the terms of the deal to lapse. Both banks told investors of the decision yesterday.

The reasons for the rejection were unclear: local media reported that the central bank had decided that UBS was not a “fit and proper” owner for the funds, which manage about $3.5 billion of assets, including for individual savers. This was played down by banking sources.

One report said that the Reserve Bank had vetoed the deal on a technicality related to the transfer of shares. Another said that UBS had failed to answer questions about transactions linked to Hasan Ali Khan, who owns a stud farm in Pune, India’s eighth-largest city, and who is being investigated by the country’s tax authorities.

Standard has put the division, Standard Chartered Asset Management, back up for sale and is understood to have received interest from several potential buyers. Economic Times, the Indian business newspaper, said that Standard had begun talks with the banking giants Goldman Sachs, Morgan Stanley and Credit Suisse. Lotus, which is controlled by Temasek, the Singaporean government investor, and Aviva, the British insurance group, were also said to be interested.

UBS has declined to say why the merger deal was blocked and referred questions to the Reserve Bank, which was unavailable for comment last night. However, the rejection is a setback for the Swiss bank, whose operations in India already include equities trading, mergers and acquisitions advice and a business processing centre that employs about 1,500 staff. It had hoped to develop a mutual funds business to take advantage of India’s booming economy and the rise of a middle class with increasing amounts of disposable income.

The Standard deal was struck last January, subject to UBS receiving the relevant regulatory approvals.

A spokesman for UBS denied that the rejection was related to its exposure to the credit crunch. UBS has been the hardest-hit of the international investment banks, writing down $3.4 billion against sub-prime American mortgages in the third quarter and later revealing plans to take a further hit of $10 billion.

Shareholders in UBS, one of Europe’s largest banks, have resisted its plans to sell a stake of up to 12 per cent to the Government of Singapore Investment Corporation and an unnamed Middle Eastern investor, thought to be the Saudi Arabian Monetary Authority.

UBS ousted Peter Wuffli as chief executive this year after high-profile losses at Dillon Read, its hedge fund. Marcel Rohner now runs the banking group.

UBS said that it remained committed to the Indian market, where demand for financial services has grown in the past two years. It indicated that it would explore other ways of developing its presence, including acquisitions and organic growth.

A strategic alliance with Standard involving the distribution of funds in Asia, which was struck in April, will still stand.

Shares in Standard Chartered dipped 5p to £18.52. UBS was SwFr0.45 higher at SwFr53.05.

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