SEBI panel suggests changes to merchant banking regulations

In August 2023, an Expert Committee under the chairmanship of S K Mohanty, former whole-time member of Sebi, was formed, which, among other things, also delved into the issue of reviewing the regulatory framework for merchant bankers.

More than 30 years after framing the rules governing merchant bankers, capital market regulator Securities and Exchange Board of India (SEBI) has suggested changes to the framework to make it more relevant in the current era.

This assumes significance as the watchdog, as part of a discussion paper, has recommended changes that would help individuals with a foreign degree act as a merchant banker. Also, the manner to ascertain the net worth of a merchant banking firm has been made more industry friendly and in sync with the current legal framework.

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As part of the ‘Recommendations for Facilitating Ease of Doing Business Under the MB Regulations’, the regulator has stated that while current rules make it mandatory for merchant bankers to have a professional qualification from a government-recognised Indian institution, the evolving landscape calls for recognising foreign qualification as well.

“One such requirement is that the applicant has a professional qualification from an institution recognized by the Government of India in finance, law or business management... It was recommended that in addition to professional qualification from an institution recognized by the Government of India… professional qualification obtained from recognised foreign universities / institutions should also be recognised,” stated the discussion paper.

“… considering the evolving market landscape, employee holding professional qualification from foreign university/ institution may be permitted,” it added.

Incidentally, merchant banking licences are given to only body corporates and hence these qualification-related compliances would be applicable to the employees employed under the merchant banking regulations.

Among other things, the committee has also suggested including “securities premium” while ascertaining the minimum net worth of a merchant banking entity – currently the net worth requirement for a merchant banking firm is pegged at Rs 5 crore.

“Under the present framework, only body corporates are eligible to be registered as Merchant Banker. Since merchant banker cannot be individuals, references to proprietor may be deleted,” stated the report.

“Since proprietary and partnership firm are not eligible to obtain merchant banking registration references to partner and proprietor may be deleted from the definition of principal officer. Further, the definition needs to be amended to include designated partner since limited liability partnership are eligible to obtain merchant banking registration,” it added.

The discussion paper is a culmination of the process that was initiated in late 2022 when SEBI reached out to merchant bankers and also the Association of Investment Bankers of India (AIBI), the industry body of merchant bankers, seeking their views on the SEBI (Merchant Bankers Regulations) Regulations 1992.

In August 2023, an Expert Committee under the chairmanship of S K Mohanty, former whole-time member of SEBI, was formed, which, among other things, also delved into the issue of reviewing the regulatory framework for merchant bankers.

Meanwhile, public comments on the recommendations can be submitted until June 11.

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