MC Explains: Why Sebi introduced, then pulled back a merchant banking rule within one quarter

Merchant bankers were found to be engaged in private placement activities pertaining to unlisted companies, advisory services for projects and syndication of rupee term loans, among other things.

The Securities and Exchange Board of India (Sebi) had introduced a significant change in norms for merchant bankers after a December 18, 2024, board meeting. Now, after the latest board meeting on March 24, the regulator deferred this change.

Here's an explainer on why this reversal was done within a span of a quarter.

What was the rule?

In the December meeting, the regulator's board had approved a proposal to restrict merchant bankers's activities to those permitted by Sebi, and not to take up valuation activities and the like. This restriction was not applicable to banks, public financial institutions (PFIs) and their subsidiaries.

If merchant bankers wanted to do activities regulated by another agency, they would need to do so by creating a separate business unit, after getting the go-ahead from that agency.

Also read: Can "educational" videos be ads? Sebi's order on Basant Maheshwari gives the answer

These activities would need to be hived off to a separate legal entity with a separate brand name within two years (from the issue of the circular). This separate entity could share resources with the merchant bank on an arm's length basis, without casting any legal liability on the merchant bank.

Merchant bankers were told not to undertake valuation activities, except to complete the ones they had already taken up. If they wanted to take up valuation activities, they would need to get a registration from the concerned authority (RBI? mention the authority) within nine months.

Why was it introduced?

The Merchant Bankers Regulations, specifically Regulation 13A, already says that merchant bankers are not allowed to do any other business than those related to the securities market. But the regulator found that some of the merchant bankers were undertaking activities that were outside of Sebi's jurisdiction.

That is, merchant bankers were found to be engaged in private placement activities pertaining to unlisted companies, advisory services for projects, syndication of rupee term loans, and so on.

This, Sebi noted, could pose "significant regulatory and systemic risk".

Why was it deferred?

Sebi said it was being deferred to ensure a level-playing field.

According to industry sources, it was pointed out to the regulator that it wasn't easy for merchant bankers to clearly separate private market activities and public listed market activities. For example, a company looking to list could be advised by the merchant banker but what if the listing does not go through, asked an insider. Then, the merchant bank could find itself in violation of Sebi norms, unwittingly, the source added.

Also a merchant bank ideally advises a company through its various stages of growth, which helps build a deeper understanding of the client's business and assist in long-term growth, an industry source said.

After receiving industry inputs and discussing these with its board in the latest meeting, Sebi said that that this change has been deferred. A press statement from Sebi said: "Revised proposals would be considered by the board at its forthcoming meeting after due internal review and evaluation of alternative approaches, instead of hiving off as originally approved and with an aim of ensuring level-playing field."