The Securities and Exchange Board of India (Sebi) has rolled out a stringent new regulatory framework that is set to trigger a significant consolidation within the country's merchant banking sector. The rules, which mandate higher capital, minimum revenue thresholds, and stricter governance, aim to weed out inactive players and bolster the financial resilience of the industry.
The Scale of Inactivity and Regulatory Response
Data reveals a stark picture of inactivity among registered merchant bankers. As of 5 January 2026, Sebi had 238 merchant bankers on its rolls. However, in the entire calendar year 2025, only 113 of them managed even a single issue across categories like IPOs, debt offerings, InvITs, and REITs. Of these active entities, about 70% handled fewer than ten issues for the year, according to data from Pantomath Capital Advisors.
This widespread inactivity is the core issue Sebi's overhaul seeks to address. The new regulations, notified in the Gazette of India on 5 December 2025 and effective from 3 January 2026, are designed to prune dormant players, strengthen balance sheets, and reduce systemic risk.
Key Pillars of the New Framework: Capital and Revenue
The framework introduces a two-tier system based on stringent net worth and liquid net worth requirements. Category I merchant bankers must achieve a net worth of ₹25 crore and a liquid net worth of ₹6.25 crore by January 2027 (Phase I), scaling up to ₹50 crore and ₹12.5 crore respectively by January 2028 (Phase II).
Category II firms face lower, yet significantly enhanced, thresholds: a net worth of ₹7.5 crore in Phase I rising to ₹10 crore in Phase II, with liquid net worth moving from ₹1.87 crore to ₹2.5 crore. Firms failing to meet Category I norms will be downgraded to Category II, while those unable to meet even the Category II standards will be barred from taking on new mandates.
In a first for the industry, Sebi has also instituted a minimum revenue requirement. Category I entities must generate at least ₹25 crore, and Category II firms ₹5 crore, from permitted activities over a rolling three-year period. Enforcement of this rule begins in April 2029, with non-compliance potentially leading to registration cancellation, barring extreme events like pandemics.
Beyond Balance Sheets: Governance and Operational Tightening
The regulatory squeeze extends far beyond financial metrics. Sebi has tightened the definition of eligible liquid assets and imposed haircuts on various instruments, making it harder to window-dress capital. It has also capped underwriting exposure at 20 times a firm's liquid net worth, directly linking risk capacity to balance sheet strength, with a compliance deadline of January 2028.
Governance has received sharp focus. All professionals employed by merchant bankers must now pass the NISM Series-IX: Merchant Banking Certification Examination. Existing staff have until 2 January 2027 to comply, while new hires get just 90 days. Principal officers must have at least five years of market experience.
Furthermore, Sebi has:
- Barred the outsourcing of core merchant banking activities, with existing arrangements to be unwound within 90 days from 3 April 2026.
- Mandated the appointment of independent compliance officers by April 2026.
- Required clear separation between Sebi-regulated activities and other business lines, with Chinese walls and distinct grievance mechanisms.
Industry Outlook: Consolidation and a Stronger Ecosystem
Industry experts view this as a necessary clean-up. Venkatraghavan S of Equirus Capital noted that Sebi wants serious, long-term players in the business, which will likely lead to dormant players surrendering their licenses. The cyclical nature of the business makes supporting too many bankers unviable, he added.
Another merchant banker, speaking anonymously, called it a positive move that addresses systemic risk. "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," the banker said.
Rajendra Naik of Centrum Capital highlighted that the bar on outsourcing core activities will improve accountability, ensuring responsibilities aren't passed on.
In essence, Sebi's comprehensive overhaul is poised to reshape India's merchant banking landscape, pushing out inactive entities, forcing consolidation among active players, and building a more robust, professional, and accountable intermediary ecosystem for the capital markets.
