Sebi revamps merchant banking norms with new capital and revenue framework

Markets regulator Sebi has revamped the rules for merchant bankers (MBs) by introducing a capital adequacy framework, requiring firms to maintain a liquid net worth and mandating a minimum level of revenue from permitted activities.

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The revised rules are intended to strengthen financial stability, enhance risk management, and promote ease of doing business.

Wider scope for merchant bankers

Under the new framework, Sebi has also permitted merchant bankers to carry out activities beyond its regulatory scope within the same firm, subject to specific conditions.

In its notification dated December 3, the regulator said a merchant banker can undertake activities which fall under the purview of any other Financial Sector Regulator (FSR) and activities that do not fall under the purview of the Sebi or any other FSB then such activities should be fee-based, non-fund based activities and pertain to financial services sector.

This comes after Sebi board in its meeting held in December 2024 approved that the non-regulated activities be hived off to a separate legal entity.

However, post-internal review and feedback obtained from market participants, the regulator relaxed the requirement of hiving off.

Category-based framework

Additionally, the regulator has categorised merchant bankers based on net worth and activities whereby Category 1 would be required to have a net worth of at least Rs 50 crore and be allowed to undertake all permitted activities.

The Category 2 would be required to have a net worth of at least Rs 10 crore and be allowed to undertake all permitted activities except managing equity issues on the main-board.

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Also, merchant bankers need to maintain liquid net worth of at least 25 per cent of minimum networth requirement, at all times. Further, underwriting obligations of MB is capped at 20 times of its liquid net worth.

Minimum revenue criteria

Sebi has issued criteria for minimum revenue from permitted activities as required by MBs.

Category 1 merchant bankers will be required to have revenues of at least Rs 12.5 crore on a cumulative basis in three immediately preceding financial years, while the same for Category 2 would be at least Rs 2.5 crore.

This criteria will not apply to merchant bankers who manage only the issuance of non-convertible securities, securitised debt instruments, security receipts, municipal debt securities, commercial papers, REITs and InvITs.

Norms to strengthen transparency

In a separate notification, the regulator has amended norms to strengthen transparency in the valuation of employee compensation.

Under this, Sebi has replaced merchant bankers with independent registered valuers for the valuation of Employee Stock Option Plans (ESOP) and Sweat Equity.

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Earlier, merchant bankers were mandated for valuations related to ESOPs and other share-linked benefits.

(With agency inputs)