MUMBAI, November 7: SEBI has shot off letters to a few merchant banking firms which have recently been downgraded by the rating agencies, asking them not to take on any fresh assignments till they achieve some financial stability.

SM Finance Ltd and Credential Finance Ltd are two such companies which have been warned by the regulatory authority following a depreciation in their financial strength. Both the finance companies are category I merchant bankers, whose rating has been downgraded to a level indicating inadequate safety. In fact, SEBI has held SM Finance Ltd's application for renewal of licence in abeyance.

The regulatory authority is also planning to issue a showcause notice to Brisk Capital Market Services Ltd whose FD programme has just been downgraded to default category by CARE.

This is the first instance of SEBI taking action against a merchant banker whose borrowing programmes have been downgraded by a rating agency. According to SEBI's merchant banking regulations, action can be taken against an intermediary if its financial position depletes to very low levels. According to SEBI sources, these companies are in such a bad state of finance that they cannot afford to take on any new assignments.

SEBI had issued a showcause notice to SM Finance last month after Crisil downgraded its fixed deposit instruments to the `FB' level, indicating inadequate safety. Crisil has now further downgraded the rating to `FD', which is the default category. Credential Finance Ltd has been downgraded to `FB+' while its NCDs have been downgraded to `BB'.

The rating agencies have recently downgraded another 15 finance companies. According to Crisil's report on the non-banking sector, these companies have been facing a slowdown in deposit mobilisation and have also been finding it difficult to get finances from banks. Deposits continue to be the main source of funds for these NBFCs.

SEBI had recently asked all non-banking finance companies to hive off their merchant banking divisions into separate companies, thus separating fee-based activities of these companies from the fund-based ones. This diktat will force the merchant banking outfits to maintain a Rs 5-crore networth which will be solely used for capital market activities. Currently, most merchant banking companies are more focussed on non-banking activities like deposit mobilisation, leasing and hire purchase.

Copyright © 1997 Indian Express Newspapers (Bombay) Ltd.