Securities and Exchange Board of India (Sebi) overhauls merchant bankers rule; introduces capital adequacy, liquid networth criteria

Key facts

• Sebi overhauled merchant bankers rule by introducing a capital adequacy framework, requiring a liquid net worth, and mandating minimum revenue from permitted activities.
• Sebi allowed merchant bankers to undertake activities falling outside its purview under the same firm, subject to certain conditions.
• As per a notification dated December 3, a merchant banker can undertake fee-based, non-fund based activities pertaining to the financial services sector that fall under another Financial Sector Regulator (FSR) or do not fall under Sebi or any other FSB.
• Sebi categorized merchant bankers, requiring Category 1 to have a net worth of at least ₹50 crore and allowing them to undertake all permitted activities.
• Category 2 merchant bankers must have a net worth of at least ₹10 crore and can undertake all permitted activities except managing equity issues on the main-board.
• Merchant bankers must maintain a liquid net worth of at least 25% of the minimum net worth requirement at all times.
• Underwriting obligations of merchant bankers are capped at 20 times their liquid net worth.
• Category 1 merchant bankers must have cumulative revenues of at least ₹12.5 crore in the three immediately preceding financial years, while Category 2 must have at least ₹2.5 crore.
• The revenue criteria do not apply to merchant bankers managing only the issuance of non-convertible securities, securitised debt instruments, security receipts, municipal debt securities, commercial papers, REITs, and InvITs.
• Sebi replaced merchant bankers with independent registered valuers for the valuation of Employee Stock Option Plans (ESOP) and Sweat Equity.
• Previously, merchant bankers were mandated for valuations related to ESOPs and other share-linked benefits.