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SEBI, or the Securities and Exchange Board of India, is the primary regulatory body for the Indian stock market. SEBI ensures that rules are properly followed when bringing IPOs to the market, issuing company shares, or conducting large financial transactions. Merchant bankers play a crucial role in this entire process, acting as a link between companies and investors.
However, the rules are now quite outdated. The 1992 regulations were designed for the smaller market of that time. Now the market has grown significantly. The size of IPOs has increased with the risks.
Therefore, SEBI has introduced new rules under the Merchant Banker Regulations 2026 that came into effect on January 3, 2026. This strengthens the financial capacity of merchant bankers, ensures investor protection, and maintains discipline in the market.
The SEBI (Merchant Bankers) Amendment Regulations, 2026, have been introduced primarily to make the merchant banking sector strong, transparent, and accountable. Through these amendments, SEBI has moved beyond the concept of merely granting registration on paper.
The new framework places greater emphasis on risk-based supervision alongside registration. The amount of risk a merchant banker can take is directly linked to its financial capacity.
The main focus of these amendments is on four areas:
These rules apply to both existing and new merchant bankers. Planning to go ahead for merchant banker registration? Well, in that case, you must understand the regulatory regime on SEBI Merchant Banker Regulations, 2026.
Several major problems emerged over time while operating under the 1992 Merchant Bankers Regulations.
The main limitations were:
These problems increased market risk, so strengthening the regulatory framework became essential.
SEBI has introduced a clear two-tier structure for merchant bankers under the new regulations. This separates the scope of work for large and small firms.
SEBI has tightened the capital requirements for merchant bankers under the new regulations. The objective is to strengthen the financial stability of entities operating in the market.
The net worth for Category I merchant bankers has been increased in phases: First phase: ₹25 crore, and Subsequent phase: ₹50 crore
The net worth for Category II merchant bankers has been set at an increase from ₹7.5 crore to ₹10 crore.
This phased approach has been adopted to prevent existing entities from facing sudden pressure.
Liquid Net Worth refers to assets that can be easily converted into cash. This includes cash, bank deposits, government securities, and money market instruments. Having actual cash on hand is now more important than just showing net worth on paper. This prevents a shortage of funds during underwriting or market risks. Consequently, merchant bankers will need to adjust their investment and treasury planning.
According to the new rules, if a Category I merchant banker fails to maintain the prescribed net worth or liquid net worth, it will be automatically downgraded to Category II. Similarly, if Category II entities fail to meet the requirements, they will be prohibited from undertaking any new assignments.
In extreme cases, SEBI can even cancel their registration. This prevents market instability caused by risky issues introduced at the last minute. SEBI has clearly demonstrated that compliance with regulations is no longer optional but mandatory.
The total underwriting liability of a merchant banker is now limited to a maximum of 20 times its liquid net worth. So, let’s check the more limitations-
SEBI has also introduced significant changes to the internal management of merchant bankers. The main goal is to increase efficiency and accountability.
The key changes are-
Deadline:
SEBI has introduced a minimum revenue condition for merchant bankers. The objective is to eliminate inactive companies or those merely holding licenses from the market.
According to the new rules, for three consecutive financial years-
This assessment will begin on April 1, 2029. Revenue-related information must be submitted to SEBI within a specified period at the end of each financial year.
However, exceptions have been made for special circumstances. For example, this requirement may be relaxed during pandemics, natural disasters, or global economic crises.
SEBI has prohibited complete outsourcing of core merchant banking activities. Critical functions such as IPO management, due diligence, or underwriting cannot be outsourced to third parties. Merchant bankers who are already engaged in such outsourcing must discontinue these arrangements by April 3, 2026.
The main objective of this decision is to ensure accountability. This will protect confidential information and maintain the quality of the due diligence process. SEBI wants the responsibility for every critical function to rest directly with the merchant banker.
SEBI has not prohibited merchant bankers from engaging in non-SEBI-regulated activities. However, such activities must be conducted through a Separate Business Unit (SBU).
These SBUs must be kept completely separate from the core merchant banking activities. This is referred to as a “ring-fencing” arrangement.
Several conditions must be met for this-
SEBI has tightened the rules regarding public issues to prevent conflicts of interest.
According to the new rules-
A merchant banker cannot be the lead manager if its directors, employees, or their relatives hold more than 0.1% or ₹10 lakh worth of shares in the issuing company.
In this situation, the merchant banker can participate in the marketing activities of the issue.
However, it is mandatory to disclose detailed information about the shareholding and relationships in the offer document. These rules will apply to issues submitted on or after January 3, 2026.
According to the new rules, merchant bankers will no longer be able to provide valuation services. The valuation of shares or companies must be done through IBBI-registered valuers.
It avoids conflicts of interest. If the same entity structures the deal and also determines the valuation, there is a risk of bias. SEBI wants the valuation process to be completely independent and impartial.
The new rules under merchant banker regulations 2026 are significantly more robust than the previous 1992 framework.
This comparison clearly shows that SEBI aims to bring more discipline to the market.
The number of small and weak firms will decrease, leading to consolidation in the industry.
In the long term, the Indian capital market will become more stable and credible.
SEBI’s new 2026 rules represent a major change for merchant bankers. Therefore, it is crucial to prepare now without waiting until the last moment. It is necessary to assess the capital and liquidity position. Fund restructuring may be required if necessary. In addition, certification, governance structure, and internal control systems must be aligned with the new rules.
Seeking professional advice throughout this entire process is very important. SEBI’s revised merchant banker regulations are complex and time-consuming. Enterslice provides complete assistance with SEBI registration, compliance restructuring, capital planning, and regular filings. Contact Enterslice today to ensure your merchant banking business remains fully compliant and future ready.
SEBI introduced several significant changes for merchant bankers in 2026. The biggest change is the tightening of net worth and liquid net worth requirements. In addition, limits on underwriting, minimum revenue requirements, mandatory NISM certification, and governance reforms have been introduced. Rules limiting outsourcing and separating non-SEBI activities have also been added. The goal of these changes is to increase transparency and investor protection in the market.
Liquid net worth refers to assets that can be easily converted into cash. Examples include cash, bank deposits, government securities, and money market instruments. Previously, many merchant bankers showed high net worth on paper but lacked sufficient liquidity in reality. SEBI has made liquid net worth mandatory to mitigate this risk, ensuring that the organization has sufficient cash on hand in emergencies.
If a merchant's banker fails to maintain the prescribed net worth or liquid net worth for Category I, they will be automatically downgraded to Category II. This will prevent them from managing mainboard IPOs. If they also fail to meet the Category II requirements, they will not be allowed to take on any new assignments.
According to the new rules, the total underwriting liability of merchant bankers must be within a maximum of 20 times their liquid net worth. This will reduce the opportunity for taking excessive risks. Previously, large underwriting was undertaken compared to the financial capacity. Now, that risk will be controlled. This will increase market stability and further strengthen investor protection.
NISM certification has been made mandatory not for all employees, but for key personnel. Specifically, principal officers, key employees, and compliance officers require NISM Series IX certification. Existing employees have until January 2, 2027, and new employees must obtain this certification within 90 days of their appointment.
SEBI has introduced minimum revenue requirements for merchant bankers under the new rules. Category I merchant bankers must achieve a minimum revenue of ₹25 crore and Category II merchant bankers ₹5 crore for three consecutive financial years. This revenue must come solely from approved activities. The assessment of this condition will begin on April 1, 2029.
Yes, exemptions from the revenue requirements may be granted in special circumstances like a pandemic, natural disaster, global economic recession, or war. However, the merchant banker must submit relevant information and explanations to SEBI.
Yes, merchant bankers can still engage in non-SEBI-regulated activities. However, these activities must be conducted through a Separate Business Unit (SBU). This unit must be kept completely separate from the core merchant banking business. It must have separate staff, separate accounts, and a separate grievance redressal mechanism. Customers must be informed that SEBI's investor protection does not apply to these activities.
SEBI has prohibited valuation services primarily to avoid conflicts of interest. Previously, merchant bankers simultaneously structured deals and determined valuations. This posed a risk of bias. Valuations must be conducted only by IBBI-registered Registered Valuers.
Merchant bankers should first review their current capital and liquidity positions. Fund restructuring should be undertaken, when necessary, like certifications, governance structures, and internal control systems must be updated according to the new regulations. Seeking assistance from experienced professional firms like Enterslice is crucial in this process.
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