SEBI hikes net worth requirement for merchant bankers; introduces clauses for cancelling licence

In terms of net worth, the SEBI board approved increasing the requirement from the current Rs 5 crore to Rs 50 crore while allowing to undertake all permitted activities

The Securities and Exchange Board of India (SEBI) has increased the net worth requirement for merchant bankers while introducing clauses based on which a merchant banking licence of an entity can be cancelled as well.

The board of the capital market regulator, which met in Mumbai on December 18, also specified that merchant bankers can undertake only a list of permitted activities that come under SEBI’s purview. All other activities, if being done currently, will have to be hived off into a separate legal entity.

"The separate entity may be allowed to carry out activities other than the permitted activities by sharing the resources with the MB on an arm’s length basis without casting any legal liability in respect of the same, on the MB," stated the SEBI press release.

"MBs (merchant bankers) shall not undertake fresh valuation activities as part of its MB Registration. However, existing valuation assignments taken up by MBs may be completed. If an MB wishes to take up valuation activities, it shall obtain registration from the concerned regulator or authority, within a period of nine months," it added.

In terms of net worth, the SEBI board approved increasing the requirement from the current Rs 5 crore to Rs 50 crore while allowing to undertake all permitted activities.

Meanwhile, a Category 2 merchant banking licence has also been introduced with a lower net worth requirement of Rs 10 crore but such entities cannot manage mainboard IPOs.

In terms of liquid net worth, merchant bankers will have to maintain a liquid net worth of at least 25 percent of the minimum net worth requirement, at all times.

"It will be mandated for MBs to earn revenue from permitted activities as given below, failing which, registration as MB shall be liable for cancellation," stated the SEBI release.

The SEBI board has also mandated that Category 1 merchant bankers will have to earn revenue of at least Rs 25 crore, on a cumulative basis, in three immediately preceding financial years.

Further, Category 2 bankers will have to earn revenue of at least Rs 5 crore, on a cumulative basis, in three immediately preceding financial years.