Industry Expert Calls for Review of SEBI's New Merchant Banking Framework
SEBI's amended merchant banking regulations, effective January 2026, face industry criticism for potentially creating oligopolistic market conditions through increased capital requirements and mandatory activity segregation. The framework represents the most significant regulatory overhaul since 1992 but may discourage high-quality professionals from entering the industry while concentrating business among large entities rather than fostering the diverse intermediary base needed for efficient capital allocation.
*this image is generated using AI for illustrative purposes only.
SEBI has notified amended merchant banking regulations along with a detailed implementation circular, marking the most significant transformation of India's merchant banking framework since 1992. The new rules, effective from January 3, 2026, have drawn criticism from industry experts who argue for a fundamental reconsideration of the regulatory approach.
Regulatory Context and Market Evolution
The current merchant banking landscape differs dramatically from the 1990s context in which the original regulations were framed. Today's market features 238 registered merchant bankers operating in a highly institutionalised ecosystem, where their role has evolved from balance-sheet underwriters to transaction architects focused on advisory-led activities.
| Era Comparison: | 1990s Merchant Banker | Current Merchant Banker |
|---|---|---|
| Primary Role: | Balance-sheet underwriter | Transaction architect |
| Risk Profile: | Absorbed risk in shallow markets | Advisory-led execution |
| Key Requirements: | Deployable capital | Judgement and credibility |
| Market Context: | Limited institutional presence | Highly institutionalised ecosystem |
Major Concerns with New Framework
Capital and Revenue Requirements
The most significant change involves sharp increases in net worth and liquid net worth requirements, coupled with minimum revenue thresholds. These requirements reflect outdated assumptions about merchant banking operations, where liquid net worth was directly linked to market risk absorption.
The analysis suggests that high capital thresholds do not necessarily translate into proportionate investor protection improvements. Instead, they risk concentrating business among a few large entities, potentially reducing market depth that depends on a broad base of credible intermediaries.
Activity Segregation Challenges
The new framework mandates segregation of non-SEBI-regulated activities into separate business units within six months. This requirement presents practical implementation challenges given the interconnected nature of merchant banking services.
| Service Integration Issues: | Details |
|---|---|
| Overlapping Activities: | M&A, capital raising, REITs, InvITs, restructuring |
| Skill Requirements: | Sector understanding, valuation, structuring span both segments |
| Transaction Reality: | Listed and unlisted elements often part of same deal |
| Timeline Uncertainty: | Strategic transactions may span several years |
Industry Structure Implications
The regulatory changes introduce a new categorisation framework for merchant bankers, similar to structures used for alternative investment funds and lending institutions. However, the analysis questions whether such distinctions reflect genuine risk profile differences in merchant banking.
The framework may inadvertently create barriers for high-calibre professionals seeking to establish merchant banking businesses, potentially reducing rather than increasing industry expertise at a time when market sophistication demands more specialised intermediaries.
Alternative Regulatory Approach
The analysis advocates for a more balanced regulatory framework focused on:
- Entity-level regulation with stronger disclosure mechanisms
- Enhanced inspection and enforcement procedures
- Robust governance standards and effective Chinese walls
- Clear accountability frameworks addressing conflict-of-interest concerns
This approach would maintain the expertise underpinning effective merchant banking while addressing regulatory objectives without creating artificial structural separations or elevated capital barriers.
Market Development Considerations
India's growing and increasingly sophisticated capital markets require diverse pools of specialist merchant bankers to enable efficient capital allocation. The current framework risks creating an oligopolistic structure that may limit rather than enhance market development.
The regulatory intent to professionalise merchant banking in complex market environments remains valid, but the implementation approach may achieve outcomes contrary to stated objectives of encouraging high-quality market intermediaries.
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