The Securities and Exchange Board of India (SEBI) is examining whether it should step in to regulate the fast-growing unlisted share market, which currently operates largely outside its direct oversight, Chairman Tuhin Kanta Pandey announced on Thursday. Speaking on the sidelines of the Association of Investment Bankers of India's annual convention, Pandey revealed that the regulator is actively discussing this significant policy shift.

Regulatory Authority Assessment

SEBI is currently discussing the issue with the Ministry of Corporate Affairs to assess whether the regulator has the legal authority to oversee companies that are not listed on stock exchanges. "SEBI first needs to examine whether it has the legal authority to regulate companies that are not listed on stock exchanges and how far such regulation can extend," Pandey stated.

Valuation Concerns Drive Regulatory Interest

A key concern for the regulator is the wide divergence often seen between prices discovered in the unlisted market and valuations that emerge when companies eventually access public markets. "Prices agreed upon in private deals often do not match the prices discovered during the IPO book-building process, creating confusion and potential risks for investors," Pandey explained.

The unlisted share market comprises equity in companies that are not traded on recognised stock exchanges, with investors typically accessing these shares through private deals, employee stock option plans or intermediaries. Since these companies operate outside the listed ecosystem, they are not subject to continuous disclosure norms, often leaving investors with limited, delayed or uneven information on financial performance and business risks.

Significant Policy Shift Under Consideration

Traditionally, SEBI's regulatory role begins once a company prepares to list its shares. Any move to regulate unlisted markets would therefore mark a significant shift, especially as participation in pre-IPO and unlisted shares has risen sharply in recent years, driven by investor appetite for early-stage exposure.

Separately, regarding the National Stock Exchange's long-pending initial public offering, Pandey said SEBI is currently examining the exchange's settlement application. "In principle, we agree with the settlement," he said, adding that the proposal is being reviewed by various internal committees.

Broader Capital Market Vision

In his address to the AIBI convention, Pandey outlined SEBI's broader forward-looking agenda for capital markets, emphasising that India's next phase of growth will require patient capital for the deep-tech, biotechnology and clean energy sectors. The regulator's priority will be to improve information accessibility and investor comprehension, while intervening firmly in cases of misrepresentation or regulatory breaches.

Pandey highlighted that markets play an increasingly central role in funding economic expansion, with equity and debt mobilisation at elevated levels and a robust IPO pipeline still in place. However, he flagged persistent disclosure gaps in offer documents, particularly around risk factors, valuation rationale and use of proceeds, placing responsibility on merchant bankers to ensure rigorous, independent due diligence.

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.

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.

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.

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.

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.