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A Case for Rethinking SEBI’s New Merchant Banking Rules
India’s capital markets have witnessed a steady evolution over the past decade, shaped by regulatory tightening, technological advancement, and a growing base of retail investors. At the center of this ecosystem lies the merchant banking industry—an essential intermediary between companies seeking capital and investors looking for opportunities. Recently, the Securities and Exchange Board of India (SEBI) introduced a new set of merchant banking rules aimed at strengthening oversight, improving accountability, and reducing conflicts of interest.
While the intent behind SEBI’s revised merchant banking regulations is commendable, the new framework has sparked concern among industry participants. Market experts argue that some provisions may unintentionally raise entry barriers, restrict competition, and slow down capital formation, particularly for small and mid-sized enterprises. As the industry begins to assess the real-world implications, a growing consensus is emerging: SEBI’s new merchant banking rules may need rethinking.
Understanding SEBI’s New Merchant Banking Regulations
SEBI’s revised rules focus on enhancing the professionalism and financial strength of merchant bankers. Key changes include stricter net worth requirements, tighter compliance obligations, and greater responsibility placed on lead managers for disclosures and due diligence. The regulator’s objective is clear—reduce malpractices, ensure higher-quality public offerings, and protect investors from misleading information.
In recent years, several IPOs have come under scrutiny for aggressive pricing, weak fundamentals, and post-listing underperformance. SEBI’s response is rooted in preventing a repeat of such episodes by holding merchant bankers more accountable. However, critics argue that regulation designed primarily around worst-case scenarios risks overcorrecting the system.
Higher Entry Barriers and Industry Consolidation
One of the most debated aspects of SEBI’s new merchant banking rules is the increase in minimum net worth requirements. While large investment banks and well-capitalized firms can easily comply, smaller merchant bankers may struggle to meet the revised thresholds.
This could lead to rapid consolidation in the industry, where only a handful of large players dominate the merchant banking space. Reduced competition may ultimately hurt issuers, especially startups and small businesses that rely on niche or regional merchant bankers for fundraising support.
Industry insiders warn that fewer merchant bankers could mean higher fees, limited advisory options, and less innovation in deal structuring. For a developing economy like India, where access to capital remains uneven, such outcomes could be counterproductive.
Impact on SME IPOs and Capital Formation
India has made significant progress in encouraging SME listings through dedicated platforms such as BSE SME and NSE Emerge. Merchant bankers play a crucial role in guiding these companies through compliance, valuation, and investor outreach.
However, the new regulatory burden may discourage merchant bankers from taking on SME IPOs, which are already considered high-risk and low-margin. Increased compliance costs and greater liability could make such deals commercially unattractive.
If fewer merchant bankers are willing to sponsor SME listings, it could slow down capital formation at the grassroots level. This would directly affect job creation, entrepreneurship, and innovation—areas the government and regulators have consistently sought to promote.
Compliance Burden Versus Practical Realities
Another concern surrounding SEBI’s new merchant banking rules is the expanding scope of due diligence responsibilities. While investor protection is non-negotiable, merchant bankers argue that they cannot realistically verify every operational or business risk associated with an issuer.
In many cases, merchant bankers rely on audited financial statements, legal opinions, and disclosures provided by the company and its advisors. Expecting them to act as de facto guarantors of business performance may expose them to disproportionate legal and regulatory risk.
This heightened liability could encourage overly conservative behavior, where merchant bankers avoid innovative or unconventional businesses altogether. In the long run, such risk aversion may stifle market diversity and delay the entry of emerging sectors into public markets.
Investor Protection Needs a Balanced Approach
There is no doubt that investor protection lies at the heart of SEBI’s mandate. However, regulation works best when it balances accountability with market efficiency. Overregulation can sometimes shift risk rather than eliminate it.
Market analysts point out that investors also have a responsibility to assess risks, especially in equity markets. Transparent disclosures, strong enforcement against fraud, and financial literacy initiatives may offer more sustainable protection than placing excessive responsibility on intermediaries.
A more nuanced approach—where merchant bankers are held accountable for process integrity rather than business outcomes—could achieve SEBI’s goals without discouraging participation.
Global Comparisons and Competitive Positioning
India aspires to be a global financial hub, competing with markets such as Singapore, Hong Kong, and Dubai. Regulatory predictability and ease of doing business play a critical role in attracting global capital and intermediaries.
If India’s merchant banking regulations are perceived as overly restrictive or punitive, international firms may hesitate to expand their presence. Domestic talent, too, may gravitate toward less regulated jurisdictions.
Experts suggest that SEBI should benchmark its merchant banking rules against global best practices, ensuring that Indian regulations remain robust yet competitive.
The Need for Industry Consultation and Phased Implementation
A recurring demand from stakeholders is deeper industry consultation. Merchant bankers argue that while SEBI engaged with market participants, more granular feedback could have helped identify practical challenges.
Phased implementation of the new rules, especially those related to net worth and liability exposure, could allow firms time to adapt without disrupting ongoing deals. Transitional arrangements may prevent sudden exits from the market and maintain continuity.
Regulation, after all, is most effective when it evolves through dialogue rather than decree.
Rethinking Without Rolling Back
Calling for a rethink does not imply rolling back SEBI’s new merchant banking rules entirely. Instead, it suggests fine-tuning them to better align regulatory intent with market realities.
Selective relaxation for SME-focused merchant bankers, clearer definitions of liability, and proportional penalties could preserve investor protection while supporting growth. Regular reviews based on market data and outcomes would further strengthen the framework.
Conclusion
SEBI’s new merchant banking rules represent a decisive step toward strengthening India’s capital markets. Yet, as the initial impact becomes clearer, legitimate concerns have emerged about higher entry barriers, reduced competition, and unintended consequences for capital formation.
A thoughtful reassessment—grounded in data, dialogue, and global best practices—can help strike the right balance. By rethinking certain provisions without compromising on transparency and accountability, SEBI has the opportunity to reinforce trust while ensuring that India’s merchant banking ecosystem remains dynamic, inclusive, and growth-oriented.
In a rapidly evolving financial landscape, smart regulation is not about being the strictest—but about being the most effective.