SEBI issues new merchant banker norms, raises capital, certification and revenue thresholds

SEBI issues new merchant banker norms, raises capital, certification and revenue thresholds

• SEBI tightens capital, compliance, certification norms for merchant bankers from 2026
• Merchant bankers must meet new net worth, revenue, and governance standards
• Outsourcing core activities banned; stricter rules for non-SEBI units.

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Market regulator Securities and Exchange Board of India (SEBI) has notified key changes to the regulatory framework for merchant bankers, significantly raising capital adequacy, compliance, certification and operational requirements, with effect from January 3, 2026. The changes aim to strengthen financial resilience, governance standards and investor protection in the merchant banking ecosystem.

Higher capital and liquid net worth norms

SEBI has introduced revised net worth and new liquid net worth requirements for merchant bankers, to be implemented in a phased manner for existing entities. Category I merchant bankers will need to maintain net worth of Rs 25 crore by January 2, 2027, rising to Rs 50 crore by January 2, 2028, along with liquid net worth of Rs 6.25 crore and Rs 12.5 crore respectively. For Category II, the thresholds rise to Rs 7.5 crore and Rs 10 crore in net worth, and Rs 1.875 crore and Rs 2.5 crore in liquid net worth across the two phases.

Merchant bankers failing to meet Category I norms will be automatically reclassified as Category II, while those failing Category II requirements will be barred from taking up fresh permitted activities.

Limits on underwriting linked to liquid networth 

SEBI has also capped total underwriting obligations at 20 times a merchant banker’s liquid net worth. Existing entities have been given time until January 2, 2028 to comply. Merchant bankers will also have to submit half-yearly certification from a chartered accountant confirming compliance.

Mandatory NISM certification and governance changes

The regulator has mandated NISM Series-IX certification for key employees and additional compliance certification for compliance officers. Existing merchant bankers staff have time until January 2, 2027 to comply, while new hires must obtain certification within 90 days.

SEBI has also required compliance officers to be independent from principal officers and key employees by April 3, 2026, and mandated that principal officers must have at least five years of experience in financial markets.

SEBI circular stated, for any registration granted on or after April 03, 2026, the application filed before January 03, 2026, this condition will be applicable from the date of grant of registration.

Minimum Revenue requirement introduced

To ensure active market participation, SEBI has prescribed a minimum cumulative revenue threshold over three financial years Rs 25 crore for Category I and Rs 5 crore for Category II merchant bankers. Failure to meet the requirement could result in cancellation of registration, with the first assessment beginning April 1, 2029. In case a merchant banker fails to generate minimum revenue, as given above, its certificate of registration is liable to be cancelled under summary proceedings under SEBI (Intermediaries) Regulations, 2008.

Though, under certain circumstances there will be exemptions like in case of natural calamities, outbreak of pandemic, Global Economic Recession and Geopolitical tensions and war. Merchant Bankers are required to submit details of revenue from permitted activities to SEBI within three months from the end of each financial year, starting from FY 2026-27.

Restrictions on outsourcing and non-SEBI activities

Merchant bankers have been barred from outsourcing core merchant banking activities and must unwind existing outsourcing arrangements by April 3, 2026. Entities undertaking non-SEBI regulated activities must segregate them through separate business units with Chinese walls, enhanced disclosures, and board-approved controls.

Disclosure of merchant bankers’ stake when acting only as issue marketers

SEBI has barred merchant bankers from lead-managing public issues where their directors, key personnel, employees or relatives hold more than 0.1 percent stake or Rs 10 lakh in the issuer, though they may participate only in marketing such issues. In such cases, detailed disclosures of the nature, amount and extent of holdings and relationships must be made in offer documents and marketing material for issues filed on or after January 3, 2026.

Strict conditions for merchant bankers undertaking non-permitted activities

SEBI has allowed merchant bankers to undertake non-permitted, non-SEBI regulated activities only through separate, ring-fenced business units with strict Chinese walls and arms-length operations. Such units must maintain separate staff, records, grievance mechanisms and disclosures, and clearly inform clients that SEBI investor protection will not apply. Advertising and websites for SEBI-regulated and non-regulated activities must be kept distinct, with upfront written disclosures and client acknowledgements mandatory. Existing arrangements must be restructured, disclosed and reported to SEBI within prescribed timelines, with board-approved oversight and half-yearly compliance confirmation.

As key intermediaries in the primary market, merchant bankers are responsible for due diligence, market integrity and regulatory compliance for themselves and issuers. With the evolution of securities markets and rising compliance requirements, their roles and responsibilities have expanded significantly hence SEBI tweaked the regulations.