MC EXCLUSIVE Merchant bankers rattled with SEBI’s ‘Relativity’ test, seek tweaks in regulation

MC Exclusive-Merchant Bankers rattled with SEBI’s ‘Relativity’ test, seek tweaks in regulation

• SEBI bars merchant bankers from lead roles if conflicts of interest exist
• Regulation 21C limits lead roles if bankers or relatives own over 0.1% in issuer.
• Merchant bankers say broad 'relative' definition makes compliance difficult

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Merchant bankers are up in arms against a SEBI provision that restricts them from acting as the lead manager of a public issue if there is a conflict of interest arising from shareholding in the issuer. The new Regulation 21C, added through the latest amendment, prohibits them from acting as a lead manager if any of its directors, key managerial personnel, compliance officer, key employees, or even their relatives hold a small financial stake in the issuer.

The amended Regulation 21C, effective from January 3, 2026, provides that a merchant banker cannot lead manage an issue if its directors, key managerial personnel, compliance officer, specified employees, or their relatives, either individually or collectively, hold more than 0.1 percent of the issuer’s paid-up share capital or shares with a nominal value exceeding Rs 10 lakh, whichever is lower.

The objection is also with respect to the definition of ‘relative’ in the amended regulation, as it not only covers blood relatives but also extends beyond them. Merchant bankers say the definition is vast and may create compliance issues. The term ‘relative’ covers the husband or wife of the person; parents of the person and parents of their spouse (mother-in-law and father-in-law); brothers and sisters of the person and of their spouse; children of the person and of their spouse, including step-children; spouses of the person’s brothers or sisters (brother-in-law and sister-in-law); spouses of the person’s children (son-in-law and daughter-in-law); and also includes the Hindu Undivided Family (HUF) of the person.

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Merchant bankers say that with such an exhaustive list under the definition of ‘relative’, it is practically difficult to check and track the portfolios of relatives, especially when, in today’s world, relatives may not be comfortable sharing details of their shareholdings.

One market source said, “The issue has been raised with the regulator through industry chambers and all concerns have been shared”. The person further added that, “the officials at regulator heard the issue patiently and assured to look into the issue”. One more round of meetings is expected this month to further discuss the matter with the regulator.

If the holding goes beyond the prescribed limit, merchant bankers can be involved only in the marketing of the issue but cannot act as the lead manager.

Another person, on the condition of anonymity, said, “this amended provision may restrict many merchant bankers from taking up assignments involving market infrastructure institutions, where other financial institutions also have a shareholding”.

Experts say Regulation 21C reflects SEBI’s priority to avoid conflict-of-interest scenarios and address concerns that personal economic interests, even if small, should not affect the professional judgment of merchant bankers.

An email seeking comments from SEBI did not elicit any response.

SEBI has also introduced new Regulations 21A and 21B to better tackle conflict-of-interest issues. It has made it clear that simply disclosing a conflict is not enough. Under Regulation 21A, a merchant banker will now be treated as an “associate” of the issuer if it has control over 10 percent of the voting rights, lowered from the earlier 15 percent threshold. This change brings more relationships under the conflict-of-interest net. If a merchant banker is considered an associate, it cannot act as a lead manager for the public issue and is allowed only to help with marketing the issue.

Similarly, Regulation 21B adopts a stricter stance by completely prohibiting merchant bankers from lead-managing their own public issues, underscoring a zero-tolerance approach to situations where the intermediary is effectively on both sides of the transaction.

A section of merchant bankers is also upset over the hike in net-worth and liquid net-worth requirements, along with the revenue criteria, arguing that the business hinges more on skill, experience and professional competence than on risk-taking capacity. They contend that such thresholds could deter new professionals from entering the field and eventually concentrate the business in the hands of a few dominant players.

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