New Delhi, Dec 8: Markets regulator Sebi has overhauled merchant bankers rule by introducing a capital adequacy framework, requiring a liquid net worth and mandating minimum revenue from permitted activities. The new rules are aimed at ensuring financial stability, improving risk management, and facilitating ease of doing business.
Merchant Bankers Allowed Wider Activity Scope
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 Sebi or any other FSB. Then such activities should be fee-based, non-fund-based activities and pertain to the financial services sector.
Earlier Plan to Hive-Off Non-Regulated Activities Relaxed
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.
New Categories Based on Net Worth and Scope
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.
Liquid Net Worth Norms and Underwriting Caps
Also, merchant bankers need to maintain liquid net worth of at least 25 per cent of the minimum net worth requirement at all times. Further, underwriting obligations of MBs is capped at 20 times of their liquid net worth.
Minimum Revenue Requirements for MBs
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.
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Independent Valuers to Handle ESOP Valuation Going Forward
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.
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