Expert Makes Final Appeal for Review of SEBI's New Merchant Banking Framework
An industry expert has renewed calls for SEBI to reconsider its comprehensive merchant banking regulatory framework effective January 2026. The expert argues that sharp increases in capital requirements and mandatory segregation of activities may concentrate business among few large entities and create practical implementation challenges, advocating instead for entity-level regulation with stronger governance and disclosure mechanisms.
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An industry expert has made a renewed appeal to SEBI for reconsidering its comprehensive merchant banking regulatory framework, which represents the most far-reaching rework of India's merchant banking regulations since 1992. The new rules, effective from January 3, 2026, have prompted concerns about their potential impact on market structure and industry development.
Regulatory Evolution and Market Context
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 |
The expert emphasised that merchant banking regulations were framed in a very different market context, noting that today's merchant banker operates more like a transaction architect, where judgement, execution capability and credibility matter far more than deployable capital.
Major Implementation Concerns
Capital and Revenue Requirements
The most significant change involves sharp increases in net worth and liquid net worth requirements, coupled with minimum revenue thresholds. The expert argues these requirements have their roots in the 1992 era of hard underwriting, when liquid net worth directly underpinned market risk.
| Capital Framework Issues: | Impact |
|---|---|
| High Capital Thresholds: | Risk concentrating business among few large entities |
| Revenue Requirements: | May deter high-calibre professionals from entering industry |
| Market Structure: | Could create oligopolistic rather than competitive environment |
| Service Nature: | Complexity doesn't scale with intermediary net worth |
The analysis suggests that high capital thresholds do not necessarily translate into proportionately higher investor protection. Instead, they risk concentrating business in the hands of a few large entities, as depth in advisory markets depends on a broad base of credible intermediaries rather than a handful of dominant players.
Activity Segregation Challenges
Under the new circular, merchant bankers are required to segregate any non-SEBI-regulated activities into separate business units within six months. The expert highlighted the practical difficulties of this mandate, noting that merchant banking services are deeply overlapping and intertwined.
| Segregation Complexities: | Details |
|---|---|
| Service Integration: | M&A, capital raising, REITs, InvITs span both segments |
| Skill Requirements: | Sector understanding and valuation expertise cross boundaries |
| Transaction Reality: | Listed and unlisted elements often part of same deal |
| Timeline Uncertainty: | Strategic transactions may span several years |
The expert provided a practical example of an unlisted subsidiary of a listed company embarking on a strategic sale, where potential buyers could include AIFs, listed companies, unlisted companies, or management itself, making classification extremely difficult.
Alternative Regulatory Approach
The expert advocates for a more balanced regulatory framework that would focus on entity-level regulation supported by stronger disclosure, inspection and enforcement mechanisms, instead of prescribing rigid structural separations and elevated capital thresholds.
| Recommended Framework: | Components |
|---|---|
| Governance Standards: | Robust oversight and accountability mechanisms |
| Disclosure Requirements: | Enhanced transparency and reporting |
| Enforcement: | Stronger inspection and compliance procedures |
| Conflict Management: | Effective Chinese walls and clear frameworks |
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 Impact
The expert expressed concern that the framework risks making "the big bigger" by creating capital and revenue moats and enforcing artificial activity silos. The analysis suggests that a growing economy requires a diverse pool of specialist merchant bankers to enable efficient capital allocation, not an oligopolistic market structure.
Given the growth and increasing sophistication of India's capital markets, the expert argues the objective should be to encourage more high-quality merchant bankers rather than introduce inherently restrictive measures. The regulatory intent to professionalise merchant banking remains valid, but the implementation approach may achieve outcomes contrary to stated objectives of encouraging high-quality market intermediaries.
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