SEBI proposes overhaul of merchant bankers’ norms

The Securities and Exchange Board of India (SEBI) on Wednesday proposed an overhaul of merchant bankers’ regulations amid a boom in the equity capital market.

In a consultation paper floated on Wednesday, the regulator suggested a sharp hike in the net worth and provided more clarity on the roles and responsibilities of investment bankers — known as merchant bankers in regulatory parlance.

“Merchant bankers play an imperative role in the primary market and have been entrusted with the responsibility to ensure appropriate due diligence, maintain integrity of the primary market and ensure compliance with the relevant laws on their own account and on behalf of the issuers. As a result of evolution of the securities markets and overall increased compliance requirements, the roles and responsibilities and business undertaken by them in the primary market have increased significantly,” the regulator said.

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Networth basis

The current net worth requirement for merchant bankers is ₹5 crore, which was last hiked in 1995 from ₹1 crore, said SEBI. The regulator has now proposed to have two categories of investment banks based on their net worth. Those with at least ₹50 crore net worth will fall under Category 1 and they will be allowed to undertake all activities that fall under SEBI’s ambit; and those with net worth of at least ₹10 crore will fall under the Category 2. They would not be allowed to handle mainboard issues.

The regulator proposed a glide path of two years to meet these requirements after they are approved by its board.

Further, SEBI has also proposed that merchant bankers maintain a fourth of their net worth in “liquid” assets — those that can be easily converted into cash.

SEBI has also said merchant bankers will be allowed to undertake only those activities related to the securities market and come under its jurisdiction. Currently, there is no specific provision around this.

Merchant bankers, other than banks, PFIs and its subsidiaries should be required to segregate all other activities (other than permitted activities) to a separate legal entity within a period of two years from a date specified by the Board, it said.

To ensure only serious players get registered as merchant bankers, SEBI has prescribed a revenue threshold of at least ₹25 crore in the three immediately preceding financial years, on a combined basis, from permitted activities.