SEBI Announces Phased Implementation of Enhanced Merchant Banking Regulations
SEBI has unveiled comprehensive amendments to merchant banking regulations with phased implementation starting January 2026. The framework introduces significantly higher capital requirements, with Category I entities needing ₹50 crore net worth by 2028, alongside new liquid net worth mandates and underwriting exposure caps. Enhanced governance standards include independent compliance officers and mandatory professional certifications, while minimum revenue thresholds could lead to registration cancellation for non-compliance.
*this image is generated using AI for illustrative purposes only.
The Securities and Exchange Board of India (SEBI) has announced detailed phased timelines for merchant bankers to comply with enhanced Merchant Bankers Regulations, including higher capital adequacy, liquid net worth requirements, underwriting limits and strengthened governance norms. The revised framework becomes effective January 3, 2026, raising entry barriers and tightening ongoing compliance for both new and existing merchant bankers. The regulatory tightening comes against the backdrop of a record primary market, with India emerging as the world's second-largest equity issuance hub, raising over $21.00 billion through IPOs and other public issues.
Implementation Timeline and Capital Requirements
Under the new regime, applicants seeking registration from January 3, 2026 must meet enhanced net worth and liquid net worth requirements upfront. Existing merchant bankers will receive a phased transition period extending till January 2028. The framework represents amendments to the SEBI (Merchant Bankers) Regulations, 1992, with staggered compliance timelines for existing entities.
| Category: | Net Worth Requirement | Liquid Net Worth | Timeline |
|---|---|---|---|
| Category I (2027): | ₹25.00 crore | ₹6.25 crore | January 2, 2027 |
| Category I (2028): | ₹50.00 crore | ₹12.50 crore | January 2, 2028 |
| Category II (2027): | ₹7.50 crore | ₹1.88 crore | January 2, 2027 |
| Category II (2028): | ₹10.00 crore | ₹2.50 crore | January 2, 2028 |
Liquid Net Worth Standards and Asset Definition
SEBI has clearly defined "liquid net worth" as unencumbered cash or near-cash assets that must be maintained at all times. This includes cash, bank deposits, government securities, select mutual fund units and listed Nifty 500 shares, subject to prescribed haircuts. The liquid net worth thresholds represent 25% of the corresponding net worth requirements. Firms failing to meet Category I thresholds will be automatically reclassified as Category II.
Underwriting Limits and Compliance Requirements
SEBI has capped underwriting exposure, mandating that total underwriting obligations cannot exceed 20 times a merchant banker's liquid net worth. Existing entities have until January 2, 2028 to align with this requirement, providing a two-year transition window. Regular half-yearly certification by chartered accountants will be required to demonstrate ongoing compliance with capital, liquidity and underwriting limits.
Enhanced Governance Framework
Governance and personnel norms have been significantly tightened. Merchant bankers must appoint an independent compliance officer, separate from the principal officer and key operational staff, by April 3, 2026. Principal officers must have at least five years of financial market experience, with existing firms given one year to comply. Professional certification has been made mandatory, requiring relevant employees and compliance officers to clear specified NISM examinations within stipulated timelines.
Revenue Requirements and Operational Restrictions
Merchant bankers will now be required to generate minimum revenue from permitted activities - ₹25.00 crore for Category I and ₹5.00 crore for Category II on a cumulative three-year basis, failing which registration may be cancelled. The first assessment will be conducted from April 2029. The circular also bars outsourcing of core merchant banking activities beyond a short transition period, tightens disclosure norms, and mandates that merchant bankers cannot lead manage any public issue where their directors or key personnel hold more than 0.10% of paid-up share capital or shares worth more than ₹10.00 lakh. The phased approach seeks to balance stability with continuity while setting higher standards for financial strength and governance in an increasingly vibrant IPO ecosystem.
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