Strengthening the Merchant Banking Framework: SEBI’s 2025 Regulatory Reforms

In late 2025, SEBI notified the Securities and Exchange Board of India (Merchant Bankers) (Amendment) Regulations, 2025, which came into effect on January 3, 2026. These amendments introduce far-reaching changes to capital adequacy, operational compliance, governance standards, and scope of activities for merchant bankers.

Merchant bankers play a vital role in India’s capital markets. They act as advisors and facilitators for initial public offerings (IPOs), rights issues, qualified institutional placements (QIPs), delisting, and a range of other corporate finance activities. The Securities and Exchange Board of India (SEBI) recently introduced a comprehensive overhaul of the merchant banking regulatory framework, marking one of the most significant changes in this segment since the original SEBI (Merchant Bankers) Regulations in 1992.

These reforms reflect SEBI’s intent to strengthen financial resilience, governance, investor protection, and market integrity in response to the growing complexity of capital markets.

Background: Why Reform Was Necessary

Until recently, merchant bankers operated under the SEBI (Merchant Bankers) Regulations, 1992, a framework introduced at a time when the Indian capital markets were relatively smaller and less complex. Over the years, however, the scale and sophistication of corporate fundraising including main board IPOs, SME platform listings, rights issues, QIPs, and hybrid instruments have expanded significantly. In response to these evolving market dynamics, SEBI introduced amendments to strengthen the existing regulatory framework and align it with current market scenario.

While the core regulatory structure remains unchanged, the amendments signal SEBI’s intent to strengthen financial resilience, accountability, and risk management standards for merchant bankers. Under the earlier framework, capital thresholds were relatively modest, liquid net worth norms were not specifically prescribed, and underwriting exposure limits lacked the present degree of risk sensitivity — areas that gained significance as transaction sizes and complexity increased.

Overview of the Amendment Regulations

Two-Tier Classification and Capital Requirements

Under the revised amendment regulations, the SEBI classifies merchant bankers into two tiers: Category I entities, which are authorised to undertake all merchant banking activities, including management of main board public issues; and Category II entities, which may carry out most merchant banking functions except managing main board public issues. SEBI has also substantially enhanced the net worth criteria, requiring Category I merchant bankers to ultimately maintain a net worth of ₹50 crore and Category II merchant bankers to maintain ₹10 crore, a significant increase over the earlier ₹5 crore threshold, in recognition of the greater scale, complexity, and risk profile of present-day capital market transactions.

Liquid Net Worth and Underwriting Limits

To ensure financial stability and solvency, the new rules require merchant bankers to maintain a liquid net worth a proportion of net worth held in easily realisable assets. SEBI has mandated that liquid net worth must be at least 25% of the required net worth.

In addition, SEBI has capped underwriting obligations. Merchant bankers cannot take on underwriting exposure exceeding twenty times their liquid net worth. This rule aims to prevent excessive risk-taking that outstrips a merchant banker’s capacity to absorb potential losses.

Clear Scope of Permitted Activities

The amended regulations introduce Regulation 13A, which sets out a comprehensive list of permitted merchant banking activities, including managing IPOs, rights issues, and QIPs; providing advisory services for acquisitions, takeovers, and delisting; handling secondary market transactions in listed securities; and undertaking private placements of securities that are listed or proposed to be listed. Activities outside this specified scope, even if regulated by SEBI or another regulator are required to be carried out through separate business units (SBUs) on an arm’s-length basis to prevent conflicts of interest and preserve the independence of core merchant banking functions.

Strengthened Governance and Compliance Standards

The regulatory reforms also prescribe enhanced governance and staffing standards, requiring the Principal Officer of a merchant banker to possess at least five years of relevant financial market experience; mandating the appointment of independent compliance officers segregated from operational roles; and obligating key personnel and employees to obtain prescribed professional certifications, such as NISM qualifications, to ensure role-based competency. SEBI has further prohibited the outsourcing of core merchant banking functions, underscoring that critical business activities must remain under the direct control of the licensed entity.

Revenue Thresholds, Classification, and Transition

The amendment regulations introduce minimum revenue conditions linked to permitted merchant banking activities. Entities must demonstrate revenue thresholds over a specified period to remain classified under Category I or II.

Existing merchant bankers must re-classify themselves according to the new categories and submit chartered accountant-certified net worth certificates to SEBI by specified deadlines. Failure to comply may lead to reclassification or operational restrictions.

Implications and Industry Impact

These regulatory reforms signal a clear move toward the professionalisation of the merchant banking sector in India, with SEBI seeking to ensure that merchant bankers are financially robust, ethically governed, and operationally transparent through higher capital, liquidity, underwriting, governance, and revenue standards. For the industry, this may result in a leaner but more capable pool of merchant banking firms equipped to handle large and complex transactions; potential short-term consolidation as smaller entities adjust to the enhanced thresholds; improved investor confidence supported by stronger oversight and risk-aligned norms; and, as observed by market participants, a possible concentration of business among larger firms that could reduce diversity within the merchant banking ecosystem.