INTRODUCTION

Merchant bankers have long served as the backbone of India’s capital markets, acting as trusted intermediaries between issuers and investors. These institutions facilitate corporate fundraising, underwriting, and advisory services, ensuring compliance with regulatory frameworks. However, they are traditionally known for their role in managing public issues and advising on mergers and acquisitions, their significance in the debt market, particularly in private placements, has grown substantially in recent years. This shift has been further accelerated by a key regulatory change introduced by the Securities and Exchange Board of India (“SEBI”) in 2024: the reduction of the minimum face value of non-convertible debentures (“NCDs”) from INR 1,00,000/- (Indian Rupees One Lakh Only) to INR 10,000/- (Indian Rupees Ten Thousand Only).

Merchant banking in India has evolved significantly since the SEBI (Merchant Bankers) Regulations, 1992. Over the years, SEBI has introduced amendments to align with global best practices and market dynamics. On August 28, 2024, SEBI published a consultation paper titled “Review of SEBI (Merchant Bankers) Regulations, 1992” to modernize and streamline the regulatory framework governing merchant bankers in India (“Consultation Paper”). SEBI subsequently held board meetings on December 18, 2024 (“December 2024 Board Meeting”) approving certain proposals of the Consultation Paper and vide meeting held on June 18, 2025 (“June 2025 Board Meeting”), SEBI modified certain approvals provided under the December 2024 Board Meeting to the SEBI (Merchant Bankers) Regulations, 1992.

SEBI’s Strategic Regulatory Amendments: Key Takeaways from the Consultation Paper and Board Meeting

The SEBI’s Consultation Paper proposed a significant shift in the regulatory framework by restricting merchant bankers—except for banks and public financial institutions—to a clearly defined set of permitted activities. This move was aimed at ensuring that merchant bankers remain focused on their core responsibilities such as managing public issues, rights issues, open offers, qualified institutional placements, underwriting etc. within the securities market. The Consultation Paper further proposed to restrict merchant bankers from undertaking non-permitted activities such as loan syndication, fundraising for unlisted entities, project finance advisory, corporate advisory services not linked to SEBI-regulated transactions, private placement of unlisted debt securities.

Subsequently, in the December 2024 Board Meeting, SEBI had approved the proposal that merchant bankers shall only undertake the permitted activities, however, the press release was silent on the list of permitted activities, whereas, in the June 2025 Board Meeting, SEBI has provided the list of revised permitted activities, inter alia as follows:

Revised list of permitted activities:

  1. Managing of public issues, qualified institutions placements, rights issues (equity and debt) and advisory or consulting services incidental to such issues.
  2. Managing acquisitions and takeovers under SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011.
  3. Filing of placement memorandum of an alternative investment fund.
  4. Private placement, secondary transactions of listed or proposed to be listed securities on a stock exchange recognized by the Board and activities incidental thereto.
  5. Underwriting activities as specified by the Board from time to time.
  6. Managing: compliances as may be required under the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015 in respect of any scheme of arrangement.
  7. advisory or consulting services incidental to such activities specified above.
  8. Any other activity as may be specified by the Board from time to time.

Key Structural Change: Hiving Off of Private Placement of Unlisted Bonds

One of the most significant structural reforms proposed in the Consultation Paper was the requirement for merchant bankers—excluding banks, public financial institutions and its subsidiaries—to hive off non-permitted activities including but not limited to the activity of private placement of unlisted debt securities into a separate legal entity. This includes instruments such as unlisted bonds and commercial papers, which are commonly used by corporates to raise short to medium-term funds outside the public issuance route.

The rationale behind this proposal was multifaceted including to ensure that SEBI registered merchant bankers engage only in activities that are SEBI regulated and prevent merchant bankers from engaging in opaque activities.

Additionally, the proposal was proposed to address potential conflicts of interest issues. When the same entity is involved in both advising issuers and facilitating private placements, there is a risk of biased advice or preferential treatment. Segregating these functions into distinct legal entities helps preserve objectivity, transparency, and investor confidence.

While SEBI vide the December 2024 Board Meeting had approved the proposal for hiving of non-permitted activities to a separate entity under a separate brand name within a period of 2 (two) years, due to the far reaching implications of the proposal and feedback from market participants, vide the June 2025 Board Meeting, SEBI has not approved this requirement of hiving off the non-permitted activities to a separate legal entity and instead set out the following conditions:

  1. Merchant bankers may undertake activities, which are within the purview of any other Financial Sector Regulator (“FSR”), provided it shall comply with the regulatory framework, if any, as may be specified by the respective FSR.
  2. Merchant bankers may also undertake activities, which are not within the purview of SEBI or any other FSR, provided they are fee-based, non-fund based activities and pertain to financial services sector.
  3. These activities shall be subject to the conditions that shall be specified by SEBI.

Revised Capital and Categorization Norms for Merchant Bankers

In a move aimed at not just strengthening the financial stability of merchant bankers but also ensuring that only responsible and capable intermediaries undertook high-stakes capital market activities, SEBI in its Consultation Paper had proposed a revised framework for the categorization and capital requirements of merchant bankers. This was not a new introduction but rather an enhancement of existing norms, reflecting the evolving complexity and scale of India’s capital markets.

Background and Rationale

SEBI observed that then-current one-size-fits-all approach did not adequately differentiate between merchant bankers based on their operational scale, financial strength, or experience. The Consultation Paper also proposed that merchant bankers who were not actively engaged in permitted activities might have had their registration cancelled. The rationale included maintaining regulatory integrity, preventing misuse of registration, avoiding regulatory arbitrage, and improving supervisory efficiency. SEBI may cancel registration if a merchant banker fails to begin operations within a set timeframe or remains inactive for a continuous period, such as 12 months, without valid justification.

This proposal was approved in the December 2024 Board Meeting and reiterated by SEBI in its June 2025 Board Meeting.

Code of Conduct Overhaul

SEBI had proposed a comprehensive revision of the existing Code of Conduct for merchant bankers to raise ethical standards and enhance transparency, accountability, and investor protection. The revised code introduced stricter norms around disclosure practices, the handling of confidential information, and the prevention of misleading or deceptive conduct. It emphasized the need for merchant bankers to act with integrity, fairness, and diligence in all their dealings.

A notable expansion in the scope of the code was that it applied to non-SEBI regulated entities that undertook SEBI-regulated merchant banking activities. This ensured that all entities involved in capital market functions—regardless of their primary regulatory affiliation—were held to the same ethical and professional standards when performing SEBI-regulated roles. However, this move was viewed by some as a regulatory overreach, particularly when applied to entities that were not directly under SEBI’s jurisdiction but were expected to comply with its merchant banker code of conduct.

Additionally, the revised code included new provisions related to shareholding disclosures. Merchant bankers were required to disclose any direct or indirect shareholding in the issuer company or its group entities. This was intended to prevent conflicts of interest and ensure that merchant bankers maintained objectivity and independence in their professional advice and transaction management.

This proposal was approved in the December 2024 Board Meeting.

Valuation Services Restriction

To eliminate potential conflicts of interest, vide the Consultation Paper, SEBI proposed that merchant bankers would no longer be permitted to offer valuation services. These services, which were critical in determining the fair value of assets during transactions, became the exclusive domain of independent registered valuers. This separation would ensure that valuations are conducted impartially and are not influenced by the merchant banker’s involvement in other aspects of a transaction, such as advisory or issue management roles.

This proposal was approved in the December 2024 Board Meeting.

Underwriting Obligations

SEBI had proposed a cap on underwriting obligations for merchant bankers at 20 times their liquid net worth.

This proposal was approved in the December 2024 Board Meeting and reiterated by SEBI in its June 2025 Board Meeting.

Conflict of Interest Restrictions for Merchant Bankers in Public Issues

To uphold the integrity of the public issue process and mitigate potential conflicts of interest, SEBI mandates that a merchant banker shall not act as the lead manager for any public issue if any of the following individuals—its directors, key managerial personnel, compliance officer, employees, or their relatives—either individually or collectively, hold:

  1. More than 0.1% of the paid-up share capital of the issuer; or
  2. Shares in the issuer with a nominal value exceeding INR 10 lakhs whichever is lower.

However, such a merchant banker may still be engaged in the marketing of the issue, provided that appropriate disclosures are made to ensure transparency.

This proposal was approved in the December 2024 Board Meeting and reiterated by SEBI in its June 2025 Board Meeting.

CONCLUSION

SEBI’s proposed amendments to the merchant banking framework along with the approvals in the subsequent board meetings, represent a far-reaching attempt to reshape the regulatory landscape of India’s capital markets. While many of the reforms—such as the tightening of capital adequacy norms, are aligned with global best practices, certain proposals have raised legitimate concerns about regulatory overreach. Chief among these is the extension of SEBI’s revised Code of Conduct to entities that are not directly regulated by SEBI but are involved in SEBI-regulated merchant banking activities. This move, while intended to ensure uniform ethical standards across all market participants, blurs the boundaries of jurisdiction and raises questions about the regulator’s authority to impose conduct requirements on entities outside its direct supervisory ambit.

One may argue that such an approach could set a precedent for expanding regulatory control beyond statutory limits, potentially leading to compliance burdens for entities that are otherwise governed by different regulatory frameworks. The concern is not about the intent—which is to promote transparency and accountability—but about the method, which may lack a clear legal basis. The proposal to apply SEBI’s code to non-SEBI regulated entities could be seen as an overextension of its mandate, unless backed by legislative clarity or inter-regulatory consensus.

The decision of SEBI in its June meeting to not require merchant bankers to hive off unregulated activities is a positive move and reflects SEBI’s evolving regulatory posture—balancing oversight with practical flexibility in response to industry needs.

Authors:

Disclaimer:

This article is intended for informational purposes only and does not constitute a legal opinion or advice. Readers are requested to seek formal legal advice prior to acting upon any of the information provided herein. This article is not intended to address the circumstances of any particular individual or corporate body. There can be no assurance that the judicial / quasi-judicial authorities may not take a position contrary to the views mentioned herein.