SEBI

SEBI Merchant Banker Regulations 2025: Key Highlights on Financial, Compliance & Underwriting Standards

On June 18, 2025, SEBI announced major changes in the SEBI Merchant Banker Regulations in its press release (PR No. 33/2025). The entire structure has been changed from the old rules of 1992, where a license could be obtained only with a net worth of ₹5 crore. This reform has become very urgent to cope with the pressure of rapidly increasing IPOs, SME listings, QIPs, debt issues, and hybrid securities.

In the SEBI merchant banker regulations 2025, SEBI has created a tier-based and risk-sensitive framework.  Here, the financial strength, liquid assets, and underwriting capacity of each merchant banker are clearly defined. The four main pillars of the entire change are-

1) New category-based capital requirements,

2) Mandatory Liquid Net Worth,

3) Underwriting limits,

4) Three-year income-based eligibility.

This change is important for both new applicants and existing merchant bankers. Because merchant banker license holders and business enthusiasts will have to show proof of large capital, strong compliance and stable income from now on.

Evolution of SEBI Merchant Banker Regulations 2025

Merchant banker regulation started with the rules of 1992. The market was small, the number of listings was low, and corporate fundraising was not complex. Although there were multiple categories of merchant bankers in the beginning, later all were brought under a single category, where a minimum net worth of ₹5 crore was the main condition for getting a license.

But the market changed rapidly during 2015–2025. Large-scale IPOs, expansion of SME platforms, complex rights issues, open offers, delisting and the flow of hybrid securities made the market more sensitive. The number of investors increased, the need for surveillance increased, and the size of the issue also became much larger.

Amidst these changes, the old ₹5 crore net worth condition was no longer sufficient. So, SEBI realized that the 1992 framework was no longer relevant for the 2025 market. Therefore, new rules under SEBI merchant banker regulations 2025 were brought in to ensure greater stability and investor protection and to maintain international standards.

Old Capital Framework: ₹5 Crore Single Condition and its Limitations

The earlier rules were-

• One category for merchant bankers.
• The minimum net worth required to get a license was ₹5 crore.
• No requirement to show liquid net worth.
• Underwriting capacity was not linked to capital.
• There was no income-based qualification or economic activity test.
• This structure was once sufficient, but as the market grew, its limitations became clear.

Its main shortcomings were-

• A merchant banker with small capital handled large Main Board IPOs. So, it was difficult to handle underwriting devolution when pressure increased.
• Due to the lack of liquid net worth, many MBs did not have the resources to deal with immediate crises.
• There was weakness in issue of pricing and due diligence. This damaged investor confidence.
• If market volatility increased, the financial stability of MBs was at risk. Risk increased in large issues, but there was no capital to bear that risk.
• A flat capital norm kept all MBs at the same level, which created inequality in risk management.

The situation made it clear that it was impossible to handle the complexity of the market with a net worth of ₹5 crore. Therefore, SEBI broke this old structure and introduced a new tiered, capital-sensitive system in the SEBI merchant banker regulations 2025.

Key Pillars: Capital Reforms under SEBI Merchant Banker Regulations 2025

In the new rules, SEBI has brought in to make the merchant banker structure stronger and more transparent. The entire system stands on a few pillars.

Key changes under SEBI merchant banker regulations 2025-

Two-tier Merchant Banker structure:

Category 1: Minimum Net Worth of ₹50 crore

Category 2: Minimum Net Worth of ₹10 crore

Liquid Net Worth Mandatory:

Each category will have to maintain 25% of the minimum net worth as liquid assets. This ensures that MBs have sufficient assets to meet their immediate liabilities, settlement, and underwriting risks.

Underwriting Cap – 20 times limit:

MBs will be able to take underwriting exposure up to 20 times the maximum liquid net worth. The level of risk is directly linked to capital.

Revenue Threshold:

Category 1: Total revenue of ₹25 crore in the last 3 years

Category 2: Total revenue of ₹5 crore in the last 3 years

This revenue requirement ensures that MBs are not just licensed but are active and effective.

Transition Timeline:

SEBI has given two years to existing MBs to adapt to the new capital and compliance framework.

Together, these four pillars make the entire merchant banking system more stable, risk-controlled, and international in nature.

Category 1 Merchant Banker

Category 1 is the highest-level merchant banker category, where large-scale issues, complex corporate structures, and high-risk work are involved.

Eligibility criteria-

Minimum net worth: ₹50 crore

Liquid Net Worth: Minimum 25%, i.e. at least ₹12.5 crore

All activities permitted-

• Main Board equity IPO management
• Open offer, buyback, delisting
• Rights issue and QIP
• Large debt or hybrid securities issue
• Complex restructuring, due diligence and high-quality corporate advisory

Importance of More Capital

Category 1 MBs have higher risks and responsibilities. Underwriting exposure can increase rapidly in large issues. So, SEBI has created the Category 1 framework to maintain the same standards as investment banks in the international market. It operates with high capital and strong risk management. So, it is for the institutions that have the financial strength, manpower and experience to support large-scale market operations.

Category 2 Merchant Banker

Category 2 is for medium-sized finance and advisory firms. While the scope of work here is wide, large tasks like the Main Board IPO management are not allowed.

Eligibility criteria-

• Minimum Net Worth: ₹10 crore
• Liquid Net Worth: At least ₹2.5 crore (25%)

All activities permitted:

• SME IPO management
• Rights issue
• Open offer, buyback, delisting
• Corporate advisory, valuation, restructuring
• Due diligence and fundraising support

Activities that are not permitted:

Category 2 is for firms that want to enter merchant banking but do not yet have the capital or team to handle large issues. It is a natural “growth path” for mid-sized advisory firms, consulting firms, and corporate finance companies.

There is an opportunity to gradually upgrade to Category 1 by building experience, revenue, and capital. So, Category 2 creates a balanced entry point for new entrants to the industry.

Liquid Net Worth: Definition, Importance and Compliance Expectations

Liquid net worth is a criterion where a merchant banker has to keep a certain portion of their net worth in cash or assets that can be quickly converted into cash. SEBI has brought this rule under SEBI merchant banker regulations 2025 so that they have assets like underwriting devolution, settlement liabilities and any urgent financial liabilities in hand quickly.

Liquid net worth generally calculates assets like cash, bank balance, fixed deposits, and marketable securities. These can be redeemed or converted into cash in a short time.

On the other hand, some things are not included in LNW, such as intangible assets, investments in group companies, long-term or highly illiquid investments, loans to related parties, and any assets that are difficult to convert into cash quickly. These cannot provide real protection to the MB in times of risk.

This rule under SEBI merchant banker regulations 2025 has brought more discipline to the treasury management of merchant bankers. They are arranging capital formation, investment policies and internal financial planning so that the LNW is always maintained at the required level. This further enhances financial stability and accountability in the industry.

Underwriting Limits under SEBI Merchant Banker Regulations 2025: 20x Limit of Liquid Net Worth and Risk Management

SEBI has linked underwriting risk directly to liquid capital in the new rules under SEBI merchant banker regulations 2025. From now on, no merchant banker will be able to take underwriting exposure more than 20x its liquid net worth. Earlier, there was no such limit, so many MBs used to take risks beyond their capacity. The new limit aligns the risk-taking capacity with real capital.

For example, if a Category 1 MB has a liquid net worth of ₹12.5 crore, then the maximum underwriting capacity will be ₹250 crore. On the other hand, if a Category 2 MB has a liquid net worth of ₹2.5 crore, then its limit will be ₹50 crore.

The new limit also brings about changes in the business model. Now, MBs will increase joint underwriting or syndication of large issues so that the risk is shared. Internal risk policy, capital planning and resource allocation will be more structured.

Revenue Thresholds: Verification of Activities to Maintain the License

Revenue-related conditions for the last 3 years-

Category 1: Total income of at least ₹25 crore

Category 2: Total income of at least ₹5 crore

Some other conditions-

• This income will be calculated only from SEBI-approved merchant banking activities.
• For those who work only in debt or hybrid issuances, this income-related obligation is relaxed.

This condition excludes inactive merchant bankers in the industry or those who only hold licenses. The new income-based test ensures that only active, efficient and market-contributing institutions will be able to retain the license.

This rule under SEBI merchant banker regulations 2025 encourages MBs to maintain continuous activities. It shows that the institution is doing real market work, managing teams and playing a specific role in the economy. So, the merchant banking ecosystem as a whole becomes healthier, more active and responsible.

Other Regulatory Changes under SEBI Merchant Banker Regulations 2025: Permitted and Unpermitted Activities

A. Activities regulated by other authorities

SEBI has now clearly stipulated that a Merchant Banker (MB) should take permission from the concerned regulator while undertaking any activity regulated by RBI, IRDAI or PFRDA. Banking, NBFC activities, and the sale of insurance products or pension-related activities cannot be done directly. If an MB wants to engage in these sectors, it will have to form a separate company.

B. Fee-based and non-fund-based services

SEBI has clarified that fee-based services, such as due diligence, transaction advisory, and valuation, can be continued. Non-fund-based services like escrow monitoring, compliance support, and project advisory are also permitted if they are consistent with the core role of the MB. However, it should be ensured that no service indirectly creates fund risk.

C. MB + Advisory/Valuation Services Terms

SEBI has permitted MBs to provide advisory, valuation, restructuring or strategic advisory services. But it is mandatory to maintain clearly documented policies and independence for these activities. It is important to disclose if there is a client conflict or “dual role” situation.

D. Ring-fencing and structural segregation

MBs will have to ring-fence their activities to control risks. The business may have to be divided through separate subsidiaries or different brands where necessary. The aim is to protect the interests of clients and keep the core business of the MB risk-free.

Old vs. New Structure: Side-by-Side Comparison

Facts	Old Rules	New Rules
Category Structure	Multiple Categories (I, II, III)	Only Category 1 and Category 2.
Net Worth	Net worth of 5–10 crores as per Category	Category 1 → ₹50 crore; Category 2 → ₹10 crore.
Liquid Net Worth (LNW)	was not defined separately	Strict LNW guidelines based on cash and near-cash.
Underwriting exposure	was open-ended, with no fixed limit.	Max 20× LNW. Directly linked to risk capacity.
Revenue condition	was not a mandatory revenue test.	Category 1 → ₹25 crore (in 3 years). Category 2 → ₹5 crore.
Main Board IPO eligibility	was only for Category I MBs, but the framework was flexible.	Strict eligibility; advanced capital, LNW, revenue condition to be fulfilled.
Small/medium MBs	could survive with less capital.	Pressure on small firms; consolidation would increase.
Large investment banks	would be in a stronger position	Small firms would move towards joint mandates.

The new framework is favorable for large-scale MBs, whereas small firms would either raise capital or be restricted to advisory. Consolidation will be seen as a natural consequence in the market.

Impact of SEBI Merchant Banker Regulations 2025 On New Applicants and Firms Below ₹10 Crore

As per the new rules under SEBI merchant banker regulations 2025, if the minimum net worth is not ₹10 crore, one cannot apply as a merchant banker. So, companies whose net worth is still ₹5 crore will not be able to apply for Category 2 as before.

Strategic options

• Raise capital to ₹10 crore: The fastest way is to raise capital and get registered as Category 2.

• Move towards ₹50 crore: If the long-term goal is to work in the Main Board IPO, then a plan should be made to increase capital gradually and move to Category 1.

• Running allied advisory business temporarily: Those who are not able to raise capital immediately may be limited to services like valuation, advisory, fundraising support, and due diligence.

• Joint mandate with Category 1 MBs: Smaller institutions can collaborate with Category 1 MBs for IPOs or large deals. This increases experience and also increases revenue.

Implications for Existing Merchant Bankers: Transition and Compliance Roadmap

SEBI has given a specific time to existing merchant bankers to meet the new net worth, LNW and revenue requirements. During this transition period, institutions will have to reassess their capital position, underwriting capacity and revenue sources. The new rules could have a significant impact, especially for those working in the Main Board IPO pipeline.

Key implications during transition-

• Low net worth entities will need to raise additional capital to retain their IPO mandate.
• Treasury portfolio restructuring as per the new LNW norms is essential.
• Some MBs will be forced to reduce underwriting exposure.
• Failure to meet revenue conditions could put their licenses at risk.

Proposed compliance roadmap

• Capital raising: Capital raising through shareholders, strategic investors or group support.
• Treasury restructuring: Increase cash, FD, T-bills, and money market instruments by reducing illiquid assets.
• Board-approved underwriting policy: Prepare a risk management policy as per the new 20× LNW limit.
• Revenue mapping: Separate SEBI-approved merchant banking revenue and non-MB revenue.

How Strong MBs Can Leverage the New Framework?

Merchant bankers with high capital and strong liquid net worth will now be able to offer services in the market at better terms. Their risk-taking ability will be at the forefront of the pricing competition.

High net worth and LNW in the new framework are strong signals in themselves. This will increase the acceptance of MBs by investors, issuers and foreign funds. Clients will prefer institutions with experience and stability in complex transactions.

Opportunities for Large IPOs and Debt-issuance Mandates

Category 1 MBs will have the opportunity to manage large-scale Main Board IPOs, infrastructure bonds, sustainability-linked bonds and large debt programs. Having high capital, they will be able to take on larger underwriting responsibilities.

Many small MBs will not be able to survive after the new rules. Strong institutions can build a larger network through joint mandates, acquisitions or strategic partnerships. This will facilitate rapid scaling and entry into new markets.

Infrastructure bonds, ESG-based bonds, restructuring advisory, distressed asset support and global fundraising will see significant growth in the coming years. Strong MBs can lead these segments.

Conclusion

SEBI merchant banker regulations 2025 have transformed merchant banking into a financial service with high capital, strong liquid net worth and strict compliance. The new framework enhances market position, strengthens investor protection and makes the merchant banking sector more professional with international standards. This framework will only create huge opportunities for strong, well-organized and skilled MBs in the coming years.

Whether you are already a merchant banker or looking to register as a new one, Enterslice is ready to provide you with complete support. We provide customized assistance at every step, from net worth assessment, LNW structure, capital planning, documentation, license upgrade, and SEBI application. Contact Enterslice today to move forward with confidence in the new regulatory environment.

All You Need to About SEBI Merchant Banker Regulations