The Securities and Exchange Board of India (Sebi) has introduced a phased rollout of stricter merchant banker regulations.
The markets regulator, which divided merchant bankers into two net-worth-based categories, has mandated a gradual increase in capital adequacy and liquid net worth.
Existing merchant bankers will now have two years to fully comply, according to a Sebi circular, published on Friday.
There are 224 merchant bankers registered with Sebi, including prominent ones like 360 ONE WAM Ltd, AK Capital Services Ltd, JM Financial Ltd and Kotak Mahindra Capital Company Ltd.
According to new Sebi rules, category I merchant bankers must maintain a net worth of 25 crore and liquid net worth of 6.25 crore by January 2027, rising to 50 crore and 12.5 crore, respectively, by January 2028. Category II firms face lower but still enhanced thresholds.
Those that fail to meet Category I requirements will be automatically designated as Category II, while firms unable to meet even Category II standards will be barred from taking up fresh mandates.
The new normsintroduced into The Gazette of India on 5 December, are set to take effect from 3 January 2026.
Stricter governance norms
The markets regulator has also tightened the definition of what constitutes usable capital by specifying eligible liquid assets and imposing haircuts on everything from listed equities to government securities. Simultaneously, underwriting exposure has been capped at 20 times liquid net worth, with existing firms given until January 2028 to align with the new ceiling.
SEBI has also focused on governance and accountability. Merchant bankers must now employ qualified professionals who have passed the NISM Series-IX: Merchant Banking Certification Examination, which was previously required only for key personnel.
An existing employee has to obtain the certification within a year of the effective date, ie 2 January 2027, while existing employees appointed on or after 3 January 2026 can take 90 days from their appointment to gain the certification.
Principal officers, who are responsible for the managerial, administrative, and operational decisions made by the merchant banker, must have at least five years of experience in financial markets.
Merchant bankers, at all times, also need compliance officers who must be independent of principal officers as well as other employees prescribed by the regulator. Firms must meet this requirement by April 2026.
Tighter operational norms
In a significant tightening of operational norms, Sebi has barred merchant bankers from outsourcing core merchant banking activities. Firms with existing outsourcing arrangements must close them within 90 days from 3 April 2026.
The regulator has also drawn a clearer line between Sebi-regulated activities and other businesses run by merchant bankers, mandating separate business units, Chinese walls, distinct grievance mechanisms, and prominent disclosures where activities fall outside Sebi’s regulatory ambit.
The circular introduces a minimum revenue requirement, another first for the industry. Category I merchant bankers will need to generate at least 25 crore and Category II firms 5 crore from permitted activities over a rolling three-year period. While enforcement will begin only in April 2029, failure to meet the threshold could lead to cancellation of registration, subject to exceptions for events such as pandemics or global recessions.
,Sebi is being proactive in making markets more robust and intermediaries more accountable. The intention is not to rule out players, but to create adequate guardrails to ensure smooth capital market transaction execution. The regulations are in line with industry expectations,” said Bhavesh A. Shah, managing director and head of investment banking at Equirus Capital.
