The Securities and Exchange Board of India (SEBI) has announced significant changes to the regulatory framework for merchant bankers. The new rules, approved during SEBI’s Board meeting on December 18, 2024, include higher net worth requirements, restrictions on activities, and stricter revenue mandates.
Key Highlights:
- Increased Net Worth Requirement
- The minimum net worth for Category 1 merchant bankers has been raised from ₹5 crore to ₹50 crore. These entities can continue to manage mainboard IPOs and other capital market activities.
- A new Category 2 merchant banking licence has been introduced with a reduced net worth requirement of ₹10 crore. However, these entities are restricted from managing mainboard IPOs.
- Liquid Net Worth Clause
- Merchant bankers must maintain a liquid net worth of at least 25% of the minimum net worth requirement at all times to ensure financial stability and operational liquidity.
- Revenue Requirements
- Category 1 merchant bankers must generate at least ₹25 crore in revenue over the three immediately preceding financial years on a cumulative basis.
- Category 2 merchant bankers are required to earn ₹5 crore over the same period.
- Permitted Activities and Resource Sharing
- Merchant bankers can only undertake a list of SEBI-approved activities. All other functions must be hived off into a separate legal entity.
- The new guidelines allow resource-sharing between the merchant banker and the separate entity on an arm’s length basis, provided no legal liabilities fall on the merchant banking entity.
- Restrictions on Valuation Assignments
- Merchant bankers cannot undertake fresh valuation assignments as part of their registration.
- Existing valuation assignments can be completed, but for future valuation services, a separate registration from the relevant regulator is required within nine months.
- Licence Cancellation Provisions
- SEBI has introduced clauses for cancelling merchant banking licences if entities fail to meet the revenue or operational requirements outlined in the revised guidelines.
These updated norms aim to bolster the financial strength of merchant bankers, streamline their operations, and ensure greater accountability in the capital markets. The changes are also expected to reduce conflicts of interest and enhance investor confidence. Merchant bankers must align with the new regulations to avoid penalties or loss of registration.
