Sebi weighing alternate ways to allow merchant bankers to offer non-Sebi regulated services

SEBI will review the alternatives internally and a fresh proposal is expected to be placed before the board, which is likely to meet in June.

Capital market regulator Sebi is contemplating ways to allow merchant bankers to carry out activities that fall outside the purview of the watchdog, after having suggested earlier that such operations can only be done by hiving them off to a separate entity, Moneycontrol has learnt from people familiar with the development.

Source in the know of the discussions said the regulator is evaluating if it can allow merchant bankers to do such activities after providing a proper disclosure, or through a special purpose vehicle (SPV).

“There are various proposals under discussion including allowing a separate segment in the existing business for unregulated businesses but with full disclosure basis. Idea of an SPV can also be explored,” said the source, on conditions of anonymity.

Moneycontrol has sent an email to Sebi seeking its response on the alternative proposals. It remained unanswered till the time of publishing this story.

The Sebi board had on March 24 approved the deferment of an earlier decision that directed merchant bankers to hive off all unregulated business such as private placement of unlisted companies, project consultancy and syndication of rupee-denominated term loans, among other things, as it believed that allowing such activities could pose systemic and regulatory risks to the capital markets.

While speaking to the media after the board meeting, Sebi chairman Tuhin Kanta Pandey said, “If alternative approaches exist to ease the business, we will explore that, because everything we do has a certain cost. So, if the risk can be mitigated otherwise then we will explore those things”.

Sebi will review the alternatives internally, and a fresh proposal is expected to be placed before the board, which is likely to convene in June.

Incidentally, Sebi had created a framework by considering the fact that some merchant banking firms are promoted by RBI-regulated banks, while others are independent - whether domestic or MNCs. Industry insiders believe the earlier proposal could have created a huge level playing field issue between merchant bankers promoted by banks and the independent or private ones.

They further add that merchant banking firms promoted by RBI-regulated banks would have got an advantage, as they were already a separate entity from the banks, which could have managed the ‘non-Sebi’ side of the business. The other merchant banking firms, however, would have been forced to hive off the businesses, industry representatives said.

Some market participants were reportedly against Sebi’s idea due to the cost factor, as creating a separate entity with its own set of resources would cost a lot especially given the seasonality of the business. Currently, a common set of resources are moved across business verticals for optimum utilisation.

Also Read: Sebi defers implementing regulatory amendments for merchant bankers, custodians

“We provide services to companies throughout the life cycle, from early-stage funding to the level of making them market ready for listing and the whole journey is based on relationship with the client. So, tweaking regulation will affect all the stakeholders,” said a merchant banker, wishing not to be named.

Sandeep Parekh, former Executive Director of Sebi and an expert on securities market laws recently commented on X, “If implemented, it would have forced merchant bankers to have one unit for listed company work and another unregulated company for un-listed company work. That would have disrupted operations well established since 1992 for some unknown benefit of reducing ‘conflict of interest’ or getting into what Seib claimed was shadow banking.”

“Globally there is no such thing as listed-only merchant bankers and unlisted-only merchant banker,” said the founder and Managing Partner of Finsec Law Advisors.