Mumbai, Dec 16: The alliance between Asian Development Bank (ADB) and SBI Capital Markets Ltd (SBI Caps) has run into rough weather following the new Securities and Exchange Board of India (Sebi) diktat that seeks to bar merchant banks from undertaking fund-based activities.

ADB may be forced to pull out of the venture -- in which it has invested $20 million -- as the SBI subsidiary is unlikely to fulfil one of the major conditions of the memorandum of understanding (MoU) with the multilateral agency: entering the capital market. In a last-ditch effort to save the venture, SBI Caps has moved the finance ministry seeking exemption from the Sebi rule.

"It is for the SBI Caps board to convince the government about the futility of the new rule. They have made another representation to the finance ministry. We have to wait for the outcome," a senior ADB official said.

He, however, refused to commit what course of action the multilateral development bank would take if the finance ministry fails to reverse the Sebi decision. Sebi had earlier ruled out any exemption to SBI Caps from the new rules.

ADB had pumped in $20 million into SBI Caps on the condition that the latter would go public, bringing down State Bank's stake in the subsidiary below 50 per cent. Divested of its leasing portfolio, SBI Caps will find it difficult to go public and justify the premium at which it placed the 14 per cent stake with ADB. The Manila-based development bank had picked up SBI Caps' shares at a premium of Rs 79 per share a year ago.

Merchant bankers point out that SBI Caps' shares will not find buyers if its business is restricted merely to fee-based activities. Most of the merchant bankers are without business from the segment following the slump in the primary market. As per the amendment to the Sebi rule, "a merchant banker other than a bank or public financial institution shall not carry on any business other than that of the securities market."

Officials at SBI Caps are waiting for details of the new rules from the gazette before deciding on their course of action. Though Sebi had announced the notification of the new rule in the Gazette of India dated December 9, the gazette is yet to see the light of the day. "We are considering all options before taking a final decision. The leasing business can be hived off and another firm can be floated to take care of the fund-based business," sources said. Even the possibility of moving the court against the diktat is not ruled out. "SBI Cap's leasing portfolio will not be passed on to the parent bank. If it is not allowed to continue with its leasing activities, it will have to run it down," State Bank chairman MS Verma said.

Copyright © 1997 Indian Express Newspapers (Bombay) Ltd.