India’s merchant bankers brace for a Sebi squeeze
Tighter capital, revenue and governance norms could force inactive players to surrender licences, reshaping the merchant banking industry.
MUMBAI: India’s merchant banking industry may be headed for a sharp contraction as the market regulator's new, tougher regulatory framework threatens to push out a large number of players who have stayed on the rolls but barely participated in the Indian capital markets.
Of the 238 merchant bankers registered with the Securities and Exchange Board of India (Sebi) as of 5 January, only 113 did even a single issue in calendar year 2025 across all categories of offerings, including initial public offerings (IPOs), small and medium enterprises IPOs, debt issues, infrastructure investment trusts (InvITs) and real estate investment trusts (REITs). Of these active entities, about 70% handled only single-digit issues through the year, according to data compiled by investment banker Pantomath Capital Advisors.
The data underscores the scale of the problem Sebi is seeking to address with a sweeping overhaul of merchant banking regulations aimed at pruning inactive players, strengthening balance sheets and reducing systemic risk—changes that are likely to trigger consolidation across the industry.
The new rules, notified in the Gazette of India on 5 December 2025 and effective from 3 January 2026, divide merchant bankers into two categories based on net worth and liquid net worth.
Category I merchant bankers must build a net worth of ₹25 crore and liquid net worth of ₹6.25 crore by January 2027 (phase I), rising further to ₹50 crore and ₹12.5 crore by January 2028 (phase II). Category II firms face lower, but still enhanced, thresholds. They must have a net worth of ₹7.5 crore in phase I, rising to ₹10 crore by phase II, while liquid net worth must increase from ₹1.87 crore to ₹2.5 crore by January 2028.
Firms that fail to meet Category I requirements will slip into Category II, while those unable to meet even Category II norms will be barred from taking up fresh issues.
“Sebi wants to have people with long-term interest in developing the markets, so this is a way to have serious people in the business. You will probably see dormant, inactive people surrendering their license," said Venkatraghavan S, managing director and head of equity capital markets at Equirus Capital. “Given the amount of business and the nature being cyclical, having too many bankers may not be viable."
Revenue test
The market regulator has also introduced a minimum revenue requirement, a first for the industry. Category I merchant bankers will need to generate at least ₹25 crore and Category II firms ₹5 crore from permitted activities over a rolling three-year period. While enforcement will begin only in April 2029, failure to meet the threshold could lead to cancellation of registration, barring exceptional circumstances such as pandemics or global recessions.
To meet the revenue and net worth criteria, merchant bankers will need to dedicate themselves to participating in issuances in the capital markets. Those who do not engage in merchant banking activities may be pushed out of the sector if they fail to meet the net worth and revenue target for at least becoming a category II merchant banker.
Capital market issuances form the core of merchant banking revenues. Firms also earn income from corporate advisory services such as providing strategic advice on mergers, acquisitions and corporate restructuring, portfolio management and loan syndication.
“It is a clean-up which is good in a way. Merchant bankers have also been given a chance to step up their net worth," said a merchant banker on the condition of anonymity. “If someone has not done merchant banking activities, why do they even need a license?"
The concern, the banker added, is systemic. “If a large issue is being done by an intermediary who does not have the needed net worth, reputation or capability, then it creates a systemic challenge. Sebi has addressed this through the new norms."
Beyond capital
The regulatory squeeze goes beyond capital. Sebi has tightened what qualifies as usable capital by defining eligible liquid assets and imposing haircuts on instruments ranging from listed equities to government securities. Underwriting exposure has also been capped at 20 times liquid net worth, directly linking balance sheet strength to the scale of risk a merchant banker can assume.
Firms have until January 2028 to comply with this ceiling.
Staffing and governance norms have also been strengthened. Under the new rules, merchant bankers must employ qualified professionals who have passed the NISM Series-IX: Merchant Banking Certification Examination, a requirement that earlier applied only to key personnel.
Existing employees must obtain the certification by 2 January 2027, while those appointed after 3 January 2026 have just 90 days.
“The NISM exam is a basic standard certification. If one is working in the industry, they should be able to pass it," said Rajendra Naik, managing director, investment banking, at Centrum Capital.
Principal officers must now have at least five years of experience in financial markets. Firms are also required to appoint compliance officers who are independent of principal officers and other prescribed employees, a requirement that must be met by April 2026.
Sebi has further barred merchant bankers from outsourcing core merchant banking activities, forcing firms with existing arrangements to unwind them within 90 days from 3 April 2026. The regulator has also drawn a sharper line between Sebi-regulated activities and other businesses run by merchant bankers, mandating separate business units, Chinese walls, distinct grievance mechanisms and prominent disclosures where activities fall outside Sebi’s regulatory ambit.
“The barring of outsourcing of core merchant banking activities will improve accountability in the industry. Though not rampant, it will ensure that responsibilities are not passed on to someone else," Naik said.
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