Merchant bankers face tighter SEBI rules on capital, staffing, and revenue thresholds

The Securities and Exchange Board of India (SEBI) has introduced sweeping regulatory changes for merchant bankers through an amended framework aimed at enhancing financial soundness, transparency, and governance. The updated rules, notified on January 2, 2026, under the SEBI (Merchant Bankers) Amendment Regulations, 2025, will come into force from January 3, 2026. 

Key developments 

1. Phased increase in capital and liquid net worth thresholds 

Merchant bankers will have to meet significantly higher capital requirements in two phases. 

• Category I: Capital adequacy must increase from ₹25 crore to ₹50 crore, and liquid net worth from ₹6.25 crore to ₹12.5 crore by January 2, 2028. 
• Category II: Capital requirements will rise from ₹7.5 crore to ₹10 crore, and liquid net worth from ₹1.875 crore to ₹2.5 crore. This phased approach provides time for compliance while pushing for financial resilience. 

2. Mandatory re-categorisation with CA-certified net worth 

All existing merchant bankers must classify themselves under Category I or II and intimate SEBI via email, along with a Chartered Accountant-certified net worth certificate, by January 2, 2027. Failure to meet the revised thresholds within the timelines will result in automatic reclassification or operational restrictions. 

3. Clear definition of ‘liquid net worth’ 

SEBI now defines liquid net worth as funds deployed in unencumbered, haircut-adjusted liquid assets such as cash, fixed deposits, government securities, and listed shares. This ensures only truly liquid assets count towards compliance. For instance, Nifty 500 stocks will carry a 30% haircut, and G-secs 10%. 

4. Cap on underwriting obligations 

Merchant bankers cannot take on total underwriting obligations exceeding 20x their liquid net worth. This is aimed at curbing excessive risk exposure and must be complied with by January 2, 2028. Certification from a CA will be required every six months. 

5. Certification requirements for staff & compliance officers 

At least two qualified professionals in finance, law, or business management must be employed. 

• Employees must clear the NISM Series-IX certification. 
• Compliance officers must also clear NISM Series-IIIA on non-fund compliance. Timelines vary: one year for existing employees, 90 days from joining for new hires from 2026. 

6. Compliance officers must be independent 

The compliance officer must now function independently of the principal officer and other employees. This separation becomes mandatory from April 3, 2026, for existing merchant bankers. 

7. Principal officer experience requirement 

The principal officer must have at least five years of experience in merchant banking or related capital market functions. Compliance with this rule is required by January 2, 2027. 

8. Ban on outsourcing core activities 

Merchant bankers can no longer outsource core merchant banking functions. Those with existing third-party arrangements must terminate them by April 3, 2026. 

9. Minimum revenue from SEBI-permitted activities 

To maintain registration, merchant bankers must generate cumulative revenue over three years: 

• Category I: Minimum ₹25 crore 
• Category II: Minimum ₹5 crore This will be assessed from FY 2028-29 onward. SEBI may cancel registration if these targets aren't met, except under force majeure events like pandemics or wars. 

10. Expanded disclosure when only marketing an issue 

If a merchant banker is only marketing a public issue without managing it, it must disclose its holdings, the nature of instruments involved, and its relationship with the issuer. This takes effect for issues filed on or after January 3, 2026. 

11. Tight conditions for non-SEBI regulated activities 

Merchant bankers may carry out non-SEBI regulated functions only through separate business units, with a strict “Chinese Wall” separating teams, infrastructure, and records. 

• Disclosure to stakeholders is mandatory. 
• No shared grievance mechanisms or cross-functioning (except for KMPs). 
• Activities must be reported to SEBI by July 3, 2026. 

These measures aim to streamline the merchant banking space, strengthen governance, and align it with global best practices. Merchant bankers have been given staggered timelines, but SEBI has warned of cancellation or curtailment of operations for non-compliance.