Sebi overhauls merchant bankers rule; introduces capital adequacy, liquid networth criteria; all you need to know

The new rules are aimed at ensuring financial stability, improving risk management, and facilitating ease of doing business.

Under the new rule, Sebi has allowed merchant bankers to undertake activities falling outside its purview under the same firm, subject to certain conditions.

In its notification dated December 3, the regulator said that 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 should be fee-based, non-fund-based activities and pertain to the financial services sector.

This comes after the Sebi board, in its meeting held in December 2024, had 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.

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 ₹50 crore and be allowed to undertake all permitted activities.

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

Also, merchant bankers need to maintain a liquid net worth of at least 25% of the minimum net worth requirement at all times.

Further, underwriting obligations of MB are capped at 20 times its liquid net worth.

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 ₹12.5 crore on a cumulative basis in the three immediately preceding financial years, while the same for Category 2 would be at least ₹2.5 crore.

This criterion 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.

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.

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