SEBI's Revised Merchant Banker Regulatory Framework

When a company appoints a lead manager for its IPO, it relies on an intermediary whose own rulebook has just been rewritten. Between December 2025 and July 2026, SEBI moved merchant banking from a largely uniform regime to a tiered one: two categories of merchant banker, higher and more liquid capital, a minimum-revenue test, a bar on outsourcing core work, tighter conflict rules, and ring-fencing of activities SEBI does not regulate.

Many of these obligations are phased in, and some dates have already moved once. What “compliant” means for a particular merchant banker therefore depends on its category and on the date you ask.

The short answer. SEBI-registered merchant bankers are governed by the SEBI (Merchant Bankers) Regulations, 1992, as amended by the SEBI (Merchant Bankers) (Amendment) Regulations, 2025, which took effect on 3 January 2026. SEBI circulars of 2 January 2026 and 11 June 2026 set the transition timelines, and the Master Circular last updated on 14 July 2026 consolidates the operative circulars. For issuers, five things matter most: the firm’s category (only Category I may manage Main Board public issues), its capital position, its conflicts of interest, who actually performs the due diligence, and what it must disclose publicly.

The Regulatory Role of Merchant Bankers

A merchant banker is an intermediary registered with SEBI to carry on specified capital-market activities. A lead manager is the role a merchant banker plays on a particular issue. Under Regulation 13A, permitted activities include managing public issues, QIPs and rights issues; acquisitions and takeovers; buybacks; delisting; compliance for schemes of arrangement; underwriting; private placement of listed or proposed-to-be-listed securities; international offerings; fairness opinions; and market making.

In a public issue the lead manager carries out due diligence, prepares the offer document with the issuer and certifies it to SEBI. SEBI’s focus on a merchant banker’s capital, independence and internal discipline is therefore, in practice, a focus on the quality of disclosure that reaches investors.

Overview of the Merchant Bankers Regulations

The framework is a stack of instruments, and each answers a different question.

Law-firm commentary describes the 2025 amendment as the first comprehensive revision of the Regulations since 1992. Two cautions follow. The Master Circular consolidates the circulars; it is not a substitute for reading the Regulations. And SEBI has already adjusted deadlines once, so any summary, including this one, should be checked against SEBI’s website on the day it is relied on.

Registration and Continuing Eligibility

Two categories. Under Regulation 3(4), Category I merchant bankers may carry out all permitted activities, including Main Board public issues. Category II merchant bankers may carry out all permitted activities except Main Board public issues. On that wording, other issue types, including those on SME platforms, fall outside the restriction, but an issuer should confirm the position for its specific route.

New and existing firms. Applicants filing on or after 3 January 2026 must meet the revised net worth and liquid net worth requirements when they apply. Firms that applied earlier, and firms already registered, are treated as existing and follow the phased timeline. Each existing firm must tell SEBI which category it will continue in, with a chartered accountant’s net worth certificate, by 31 March 2027 (extended from 2 January 2027). A firm that misses the Category I thresholds is redesignated Category II. A firm that misses the Category II thresholds may not take on fresh permitted activities.

People. The “principal officer” must have at least five years of experience in the financial markets; existing firms have until 2 January 2027. The employees who meet the professional-qualification requirement under Regulation 6(b) must hold the NISM Series-IX Merchant Banking certification, and the compliance officer must hold NISM Series-IX and NISM Series-IIIA. Existing staff have until 2 January 2027; people appointed on or after 3 January 2026 have ninety days from appointment.

Continuing eligibility also rests on the “fit and proper” criteria in the Intermediaries Regulations, 2008, SEBI’s prior approval for a change in control, and a local presence in India through a company or LLP.

Capital and Financial Requirements

Before the amendment, a uniform net worth of ₹5 crore applied. The new framework has three capital-related tests.

For existing firms, SEBI’s January circular set Phase I at 2 January 2027 and Phase II at 2 January 2028. The 11 June 2026 circular moved these to 31 March 2027 and 31 March 2028, according to reports of the circular. Applicants since 3 January 2026 do not get the phase-in.

Liquid net worth means net worth held in unencumbered liquid assets, valued as recorded in the books with a haircut: none for cash and bank fixed deposits, 10% for government securities and units of overnight, liquid or government-securities funds, and 30% for listed Nifty 500 securities. Firms must maintain it at all times and have a chartered accountant certify it half-yearly.

Underwriting cap. Total underwriting obligations may not exceed twenty times liquid net worth. Existing firms have until 2 January 2028.

Minimum revenue. Cumulative revenue from permitted activities over the three preceding financial years must be at least ₹25 crore for Category I and ₹5 crore for Category II. The first assessment is from 1 April 2029, and SEBI has said it will consider circumstances such as natural calamities, a pandemic, a global recession or geopolitical conflict before cancelling a registration. Firms report this revenue within three months of each financial year-end, starting FY 2026-27.

These are floors. They indicate capacity to absorb risk; they say nothing about the quality of a firm’s work on a given transaction.

Governance and Compliance Responsibilities

• Independent compliance officer. The compliance officer must be separate from the principal officer and from the Regulation 6(b) employees. Existing firms had to comply by 3 April 2026.

• Half-yearly reporting. Reports go through the SEBI Intermediary Portal within three months of each half-year, certified by the compliance officer and reviewed by the board, including the due diligence process followed on issues managed. They carry chartered accountant certificates on net worth, liquid net worth and underwriting exposure.

• Conflicts of interest. The threshold for treating a firm as an “associate” of an issuer has been lowered from 15% to 10% (Regulation 21A). A merchant banker may not manage its own issues (Regulation 21B). Under Regulation 21C, a firm cannot lead-manage a public issue if its directors, key managerial personnel, compliance officer, qualified employees or their relatives hold more than 0.1% of the issuer’s paid-up capital or shares with nominal value above ₹10 lakh, whichever is lower. It may then be involved only in marketing, with disclosure in the offer document and marketing material, for issues filed on or after 3 January 2026.

• Separate business units. Activities outside the permitted list may be carried on only through an arm’s-length separate business unit (Regulation 13A(2)), now due by 31 December 2026.

• Public disclosure. Merchant bankers must publish the three-year post-listing record of public issues they have managed, the SEBI Investor Charter and monthly complaint data on their websites.

Due Diligence and Record-Keeping

Due diligence cannot be outsourced. Under Regulation 9A(1)(i), core merchant banking activities, specifically due diligence and preparation of offer documents, may not be outsourced. Existing arrangements had to be closed by 3 April 2026. Compliance functions and KYC obligations are also not outsourceable under the Master Circular’s outsourcing principles.

Records. Law-firm commentary reports that the minimum retention period for books and records has increased from five years to eight financial years (Regulation 16(1)), with data kept within India. This point should be confirmed against the regulation text before publication. Separately, merchant bankers using cloud-based governance, risk and compliance tools must keep critical compliance data within India’s legal and jurisdictional boundary and confirm this in each half-yearly report.

Joint accountability. Where several merchant bankers sign the due diligence certificate on an issue, each carries the obligation to disclose that issue’s post-listing record.

Internal Controls and Risk Management

The framework turns several control expectations into formal requirements.

• Ring-fencing. A separate business unit needs a Chinese wall, separate records, distinct staff (key managerial personnel may cross, under board-approved procedures), its own grievance mechanism, and separate advertising and web pages. The firm must also ensure that the net worth required for SEBI-regulated activity is protected from losses in other activities.

• Client disclosure. For non-SEBI-regulated work, engagement letters and contracts must state that SEBI’s investor protection mechanisms do not apply, and the client’s acknowledgement must be obtained.

• Conflict and rumour controls. Boards must approve policies to identify and manage conflicts. Firms must restrict trading around active mandates, control unpublished price-sensitive information, and route market-related news received by staff through the compliance officer.

• Outsourcing risk. For any activity that may still be outsourced, the Master Circular sets risk principles covering operational, reputational, legal, concentration and exit risk.

• External checks. Chartered accountant certificates on capital and underwriting exposure give the regulator, and a diligent issuer, an independent data point.

What Issuers Should Consider When Selecting a Merchant Banker

A registration certificate is a starting point. A practical checklist for promoters and CFOs:

1. Category. Ask which category the firm is in or has applied for, and whether that category permits your route.

2. Capital position. Ask how the firm meets the net worth and liquid net worth requirements for its category, and where it stands on the phase-in.

3. Conflicts. Ask the firm to confirm in writing that no Regulation 21A–21C conflict exists, or to describe the disclosure it will make.

4. Who does the work. Ask who on the firm’s own team will carry out due diligence and draft the offer document, since these cannot be outsourced.

5. Team credentials. Ask whether the principal officer, qualified staff and independent compliance officer meet the experience and NISM requirements or are within their transition window.

6. Public record. Review the post-listing track record, Investor Charter and complaint data the firm must publish on its website. Treat them as evidence, not endorsement.

7. Engagement letter. Read the disclosures about any non-SEBI-regulated services bundled into the mandate.

8. Continuity. Ask how the firm will manage the transition dates between now and March 2028 without disrupting your timetable.

Hypothetical illustration (not a real transaction). A manufacturer with ₹4 crore of paid-up capital, in ₹10 shares, shortlists two merchant bankers for a Main Board IPO. Firm A discloses it is Category II. On the Regulations’ wording, it cannot manage a Main Board public issue, so it is not an option for that route. Firm B is Category I, but a relative of its compliance officer holds 5,000 shares in the company. The Regulation 21C limit is the lower of 0.1% of paid-up capital and ₹10 lakh of nominal value. Here 0.1% of ₹4 crore is ₹40,000, or 4,000 shares. The 5,000-share holding (₹50,000) exceeds it, so Firm B could be involved only in marketing, with disclosure, and not as lead manager. The same facts with a ₹3,000 holding would not cross the threshold.

Common Mistakes

• Treating all SEBI-registered merchant bankers as having identical scope and capital.

• Assuming a well-known firm is Category I without asking.

• Relying on a pitch presentation rather than the firm’s public disclosures.

• Skipping the engagement-letter wording on non-SEBI-regulated services.

• Treating transition dates as fixed. They have already changed once.

• Confusing a firm’s eligibility to act with the issuer’s own eligibility, approval or listing outcome. The merchant banker’s compliance does not guarantee SEBI’s observations, investor demand or pricing.

Frequently Asked Questions

What is the main SEBI regulation for merchant bankers?

The SEBI (Merchant Bankers) Regulations, 1992, as amended by the SEBI (Merchant Bankers) (Amendment) Regulations, 2025, in force from 3 January 2026, read with SEBI’s circulars and the Master Circular updated on 14 July 2026.

What is the difference between Category I and Category II merchant bankers?

Category I firms may undertake all permitted activities, including Main Board public issues. Category II firms may undertake all permitted activities except Main Board public issues, and face lower capital thresholds.

What net worth must a merchant banker have?

New applicants since 3 January 2026 must meet ₹50 crore (Category I) or ₹10 crore (Category II), plus liquid net worth of ₹12.5 crore or ₹2.5 crore. Existing firms follow a phased timeline whose latest reported dates are 31 March 2027 and 31 March 2028.

Can a merchant banker outsource due diligence?

No. Due diligence and offer-document preparation are core activities that may not be outsourced.

How can an issuer check a merchant banker’s record?

Through the post-listing track record, Investor Charter and complaint data the firm must publish, and by verifying registration on SEBI’s website.

Conclusion

SEBI’s 2025–26 changes raise the bar for merchant bankers and give issuers more to examine than a registration number. The most useful questions concern category, capital, conflicts, who performs the due diligence and what the firm discloses publicly. Because timelines are phased and have already been revised, verify the position on the date you appoint.

Understand the Framework Before You Appoint

Understand the regulatory framework that governs IPO lead managers and merchant bankers. To discuss how these requirements bear on your listing plans, speak to the team at JDA Capital Services Limited, a SEBI Registered Category I Merchant Banker (Reg. No. INM000012546).

Disclaimer: This article is general educational information, not legal, financial or investment advice. Regulatory requirements and timelines change; refer to SEBI’s official publications and take professional advice for your transaction. Nothing here implies endorsement by SEBI, NSE, BSE or any authority, or any assurance of eligibility, approval, pricing or listing outcome.