Initially, a government of India notification had stipulated that merchant bankers should segregate fund-based from non-fund based activities with effect from December 9, 1997. Later, SEBI extended the deadline to June 30.A SEBI release last December said that the deadline extension for the segregation of activities followed a representation received from the Association of Merchant Bankers of India.

The SEBI notification had said: "Notwithstanding anything contained above, if a merchant banker prior to the date of notification of the Sebi (merchant bankers) amendmentregulation 1997, has entered into a contract in respect of a business other than that of the securities market may, if he so desires, discharge his obligations under such contract." This in effect allowed merchant bankers to run down their fund-based assets in stages. "We will concentrate only on merchant banking activities while fund-based activities like leasing will be done by the parent State Bank.

However, we will continue to have our NBFC registration for the time being to run down the existing leasing and hire purchase portfolio," SBI Caps managing director AR Barwe said. In contrast, Allahabad Bank's merchant banking arm Allbank Finance has decided to turn into an NBFC and pass on the merchant banking licence to the parent. "Allahabad Bank has licences to act as banker to issues and undertake underwriting commitments.

We are transferring the merchant banking licence to it (the parent bank) as well," an Allbank Finance source said. The outfit will now concentrate on leasing, hire purchase and loansyndication. "Soon we will get ourselves rated and access public deposits," the Allbank Finance source said. The outfit, with a Rs 26 crore net worth, posted a Rs 2.4 crore net profit in March 1998.

The merchant banking outfits of state-run banks like Punjab National Bank, Bank of India and Indian Bank will, however, focus on only merchant banking activities and hive off the fund-based activities to their parent banks.Profiles of leading merchant Bankers like DSP Merrill Lynch, Kotak Mahindra and JM Finance will not undergo any change as they do not have fund-based activities.

Sebi had in December last year allowed merchant bankers to carry on undertaking fresh fund-based business till June, 1998, following Ambi's representations. Ambi had argued that it would take nothing less than one year for merchant banks to spin off or transfer their fund-based businesses to new or allied entities since legal requirements had to be met.

The merchant banks would have had to enter into `schemes of arrangement' whichrequired the assent of the high courts. Also, the transfer and division of capital would dilute the capital bases of most merchant bankers, Ambi had argued. This in turn would have made them ineligible to qualify as merchant bankers. Sebi's rules say that a merchant banker should have a minimum capital base of Rs 5 crore.