SEBI's contention is that since banks have accesss to privileged information about their client companies, they use them for making investments in stock markets, which amounts to insider trading.

The central bank has, in turn, asked banks to provide details about their investments and credit departments' functioning and sought their views on the accusation.

All major investment decisions in banks are cleared by investment committees, comprising representatives from their credit departments. SEBI, sources said, wants banks to create `fire-walls' between the investment committee and the credit department, which is the repository of information on client companies. The markets regulator maydemand that no representative of a bank's credit department should sit on its investment committee and vice-versa.

Banks are currently framing replies to the central bank queries. The queries are not restricted to investment in stock markets alone, but pertain to all investments in primary issues of bonds, debentures and shares.

It was only this year that banks entered the markets in a big way, even though the central bank had allowed secondary-market investments of up to 5 per cent of their incremental deposits last year. State Bank of India has been a major investor for the past six months, investing above Rs 100 crore in the secondary market. Bank of Baroda, too, actively invests in the secondary market.

The current low valuations of pivotal stocks and a squeeze on lending have prompted banks to look elsewhere to shore up their bottomlines. Both the government and the Reserve Bank encoure banks to invest in the secondary market up to the permitted limit. The recent problems of Unit Trust and the needto buoy the secondary market for the disinvestment programme have made banks' investment vital for the government.

Banks are likely to contest the SEBI accusation. "Whatever primary-issue information banks have is also available with other investors through prospectuses. So there is no question of having privileged information. The accusation could be true for secondary-market trading in equities. But, we already have a fire-wall in place, as the secondary-market operations are done by a separate official designated as a trader. The buy-or-sell decision on a specific scrip is taken by him in his individual capacity. What the investment committee decides is the quantum of total trading exposures and exposures to specific sectors. The health of various industrial sectors is a matter of public knowledge and does not amount to privileged information," said a senior official of a public-sector bank.

INSIGHT
Bifurcation is must

SEBI is merely being consistent in applying its own rules. Thesame rule of segregating fund and non-fund based activities is in vogue for merchant bankers and brokers, as well. Even a bank's asset-management business is done through a separate subsidiary. So instead of fighting SEBI on this norm, the banks should accept as a good practice and segregate these activities. In fact to avoid any ethical allegations in future, banks should route all stock-market activities through their asset-management subsidiaries.