SEBI's Merchant Banker Reforms: From Information Disclosure To Ex-Ante Discipline

Merchant Bankers (“MBs”) play a central role in India's capital market as intermediaries between the issuers and the investors. Their primary role and functions include but are not restricted to management of issues, compliance with laws, ensuring due diligence, and providing corporate advisory services, but over time, the absence of clearly demarcated boundaries governing the scope of activities to be undertaken by MBs resulted in a significant expansion of their roles, even in fields that did not fall within SEBI's jurisdiction such as rupee term loan syndication, project advisory, etc.

To date, the activities performed by MBs were regulated and supervised under the SEBI (Merchant Bankers) Regulations, 1992. The rationale behind it was that conflicts of interest and intermediaries responsibilities could be appropriately assessed and managed through norms related to due diligence, transparency, and post-issuance enforcement measures. This mechanism placed the burden on the investors as it required them to be on their front foot and actively evaluate the risks before investing, as long as relevant material information was disclosed in offer documents by the MBs.

The backdrop of this, SEBI felt the need for tightening of rules and ex-ante intervention for protection of investors' interest and holding the MBs accountable, therefore, it brought the SEBI (Merchant Bankers) (Amendment) Regulations, 2025, which has come into force on 1 January 2026. The amendment reflects a shift from focusing on disclosure obligations to disciplining the conduct of MBs.

Fixing Responsibility And Market Entry Before Regulatory Conduct

The amended regulatory framework reflects SEBI's intent to fix responsibility at the threshold itself, even prior to permitting the entry of a merchant banker into the market. The underlying rationale is that effective regulation is best achieved when accountability is clearly established before regulatory oversight is exercised.

Under the amended provisions, the Principal Officer (“PO”) is expressly recognised as the individual responsible for the day-to-day functioning and operations of merchant banking activities and as the primary decision-making authority for issue management and advisory functions before SEBI. The amendment mandates that the PO must be a full-time employee of the merchant banker with a minimum of five years' experience in the financial markets. Further, the PO must be formally designated by the merchant banker and bear responsibility for decisions taken in relation to the management and administration of merchant banking activities, as well as all other operational functions of the merchant banker.^] Notably, the earlier regulatory framework did not prescribe any minimum qualifying experience or compulsory employment requirement for the Principal Officer.

Under the earlier regime, Regulation 26 prohibited the acquisition of 'Shares' by a merchant banker or its directors, partners, managers, or principal officers, either through their own accounts or those of their relatives or associates, where such acquisition was based on unpublished price sensitive information obtained during the course of a professional assignment. However, evolving market dynamics, driven by technological innovation, changing investor preferences, and the need for greater diversification, have resulted in the emergence of a wider range of securities. Recognising this evolution, the 2025 regulatory framework substitutes the term “shares” with “securities” in Regulation 26, thereby expanding the scope of the prohibition to cover all forms of securities and ensuring comprehensive regulatory coverage.

Further, the reporting obligations under Regulation 27 have also undergone a significant shift. The currently applicable provision adopts a periodic reporting mechanism, under which merchant bankers are required to furnish complete particulars of acquisitions of securities of issuers managed by them, acquisitions pursuant to underwriting or market-making obligations in accordance with the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018  and any other information as may be specified by SEBI, as part of the periodic report under Regulation 28(2).

 Capital & Economic Substance As Tool Of Discipline 

The shift SEBI has brought in its regulatory philosophy becomes apparent through its way of treating capital. Prior to the 2025 amendment, capital was used as a onetime entry condition for determining who could register as an MB. The net worth requirement of not less than Rs.5 Crore was applicable uniformly on all categories; once it was met, SEBI refrained from further using capital as a tool for regulating activities performed by MBs or for risk management. The current amendment has abandoned this approach and has shifted the role of capital from merely ensuring eligibility to acting as an instrument of discipline.

Under Regulation 7, a transition from a flat-level framework to a tier-based framework has been brought with respect to capital adequacy. This structure is linked with the ambit of permitted activities under Regulation 3(4). Category I MBs, who can carry out all permitted activities, are required to have a minimum net worth of Rs.50 Crore whereas Category II MB, who are allowed to carry out all permitted activities except main board public issues, must have a minimum net worth of Rs.10 Crore. This system ensures that only MBs who have appropriate loss absorbing capacities are allowed to manage high stakes public issues.

A new requirement relating to liquid net worth has been introduced under Regulation 7A. It recognises that if capital cannot be mobilized at the time of need, the provision fails to protect the interests of investor.^] To further safeguard the interests of market participants, Regulation 22B(2) puts a cap on total underwriting obligation. It shall not exceed twenty times the liquid net worth of the MB, thereby relieving investors of the burden of assessing The leverage risks through disclosure relating to underwriting agreements, as a behavioural constraint has been imposed to regulate how fiercely the MBs may operate in the market.

A provision related to minimum revenue generation has also been introduced under Regulation 9C; although the amount is yet to be specified, the intent does not go unnoticed that registrations without any substantial economic activity will not be entertained. It helps in filtering out dormant and low activity MBs.

Prevention Of Conflict Instead Of Disclosure

The MB Regulations, prior to the 2025 amendment, provided space for MBs to expand their scope of practice in other fields such as syndication, private placement of unlisted securities, among others, with all such functions being performed within the same legal entity. Conflicts arising from these activities were indirectly dealt with by way of disclosure and general obligations of due diligence. This framework was based on the assumption that once MBs disclosed the required material information relating to potential risks in the offer documents, the investors would make informed decisions based on that. But this whole assumption is based on a flawed premise that conflicts can be adequately evaluated by investors. While disclosure makes conflicts known to investors, it does not put them in position to assess how such conflicts would affect the pricing or issue structuring.

Regulation 13A shows a clear shift from this approach for the first time. SEBI has restricted the scope of functions MBs may perform by giving an exhaustive list of permitted activities, which includes capital market issuances and activities incidental to such issues. Other activities, whether regulated by SEBI, other financial regulator, or authority specified by SEBI, as well as activities not falling in the ambit of regulatory purview, can be undertaken by MBs only through separate business units (“SBUs”) on an arm's length basis so that failure in adjacent activities does not lead to distortion of core activities such as pricing and issue management.

Zero Tolerance Conflicts

All conflicts cannot be treated the same. While some conflicts can be mitigated through disclosure, others interfere with the independence of merchant bankers. The 2025 amendment shows that SEBI no longer considers such conflicts of interest as negotiable. Regulations 21A, 21B, and 21C identify categories which are unacceptable irrespective of transparency measures or internal compliance and risk control. In short, under these regulations, disclosure has ceased to be a defence.

The concept of 'association' has been tightened under Regulation 21A. The regulation has lowered the threshold for determining whether an MB shall be deemed to be an “associate of the issuer or person” from 15% to 10% of control over voting rights. This has ensured that any unfairly influential relationships come under the category of inherently conflicted relationships. If an MB is established to be an associate of the issuer, it is barred from performing any lead managerial roles and can only be involved in the marketing of the issues.  This provision relies on the logic that transparency alone is not sufficient to address conflicts; therefore, it becomes necessary to curtail the role an MB plays if economic alignment is established.

A clear depiction of zero-tolerance policy is reflected in Regulation 21B, which prohibits MBs from being a lead manager in their own public issue or from being associated with any other activity under SEBI regulations related to such issue^]. Unlike other conflict situations, reliance cannot be placed on enhanced disclosure, role limitation, or internal governance where intermediary stands on both sides of the transaction.

Regulation 21C extends this zero-tolerance approach to situations where conflicts arise from the personal shareholdings of individuals within the merchant banker. It is prohibited for a MB to act as a lead manager if any of its directors, key managerial personnel, compliance officer, employees referred to in Regulation 6(b) and even their relatives hold a small financial stake. If such persons, either individually or collectively, hold more than 0.1% of the paid-up share capital of the issuer or shares having a nominal value exceeding Rs.10, 00,000, whichever is lower, the merchant banker is barred from acting as the lead manager to the issue. The low limits prescribed under the regulation signal SEBI's concern that personal economic interests, however modest, can affect professional judgment.

At best, the MB may be allowed a limited marketing role, subject to disclosure. This reflects SEBI's clear intent to ensure that those responsible for managing public issues remain entirely independent and free from personal financial incentives tied to the success of the issue.

In simple terms, the 2025 amendment shows that SEBI has changed how it looks at merchant bankers. Instead of only asking them to disclose information and leaving investors to judge the risks, SEBI now wants to prevent problems before they arise. By clearly fixing responsibility, tightening entry conditions, using capital as a check on risky behaviour, and completely barring certain conflicts of interest, the focus has shifted to controlling how merchant bankers act in the market. The message is clear that protecting investors is no longer just about giving information, but about ensuring that intermediaries operate responsibly, independently, and within clearly defined limits.