SEBI to Amend Merchant Banker Regulations, 1992

Securities Exchange Board of India

Review of Securities and Exchange Board of India (Merchant Bankers) Regulations, 1992 Amendment to SEBI (Merchant Bankers) Regulations, 1992

1. Objective

1.1. This memorandum seeks the approval of the Board to amend the SEBI (Merchant Bankers) Regulations, 1992 (hereinafter referred to as “MB Regulations”) and issuance of relevant circulars for giving effect to the amendments.

2. Background

2.1. MB Regulations were notified on December 22, 1992. The objective of the MB Regulations, inter alia, was to lay down broadly the regulatory framework for registered Merchant Bankers (‘MB’), their eligibility, activities and responsibilities in securities market.

2.2. Considering the changes in market dynamics over the past three decades, a comprehensive review of MB Regulations has been undertaken.

2.3. Based on the discussions held with market intermediaries and internal deliberations regarding the review of MB Regulations, a detailed agenda note was placed before the Primary Market Advisory Committee (PMAC) at its meeting held on July 22, 2024 for its consideration and deliberations.

2.4. A consultation paper based on recommendations of PMAC and internal deliberations was placed on the website of SEBI on August 28, 2024, seeking public comments on proposals made therein. The consultation paper is placed at Annexure I.

2.5. In response to the same, 1832 public comments have been received from 66 commenters, including 43 MBs, 3 Industry bodies and 20 others i.e., Research Institutes, professional accounting bodies, other departments of SEBI and individuals.

2.6. The following paragraphs describe the issues for consideration, analysis of comments and the proposals for the consideration of the Board. Further, the existing provisions, PMAC recommendations, summary of public comments and the analysis of the same are placed at Annexure-II.

3. Review of activities that merchant bankers can undertake.

3.1. Issues for consideration

3.1.1. It has been observed that some of the MBs are currently undertaking certain activities that are outside the purview of SEBI such as private placement activities pertaining to unlisted companies, advisory services for projects and syndication of rupee term loans etc.

3.1.2. Accordingly, ‘permitted activities’ that merchant bankers may undertake needs to be defined. While prescribing such ‘permitted activities’, a carve out needs to be made for Banks, Public Financial Institutions (PFI), (which are supervised by RBI) and their subsidiaries.

3.1.3. Similar provisions on segregation of activities other than securities market related activities have been enshrined under SEBI (Credit Rating Agencies) Regulations, 1999 and SEBI (Depositories and Participants) Regulations, 2018.

3.2. Analysis of Public Comments and rationale for recommendations:

3.2.1. Some of the Public comments received, wherein, it is suggested that MBs be allowed to undertake activities in unlisted companies as MBs generally provide services to a company throughout its life cycle i.e., from formative stage where a company requires private capital fund raising to grow its business and be market ready for listing. Further the MBs do not manage the public issues as a standalone activity.

3.2.2. There were submissions that certain transactions, which initially start as and are expected to be public issues, may turn out to be only private placements as the transaction progresses. In such cases, it might become difficult for MBs to ensure the compliance with the requirement not to undertake private placement of unlisted entities.

3.2.3. Also, giving an exemption to Banks, Public Financial Institutions (PFI) and their subsidiaries would give them a competitive edge over other MBs, hampering the competitive environment in the industry. The detailed comments are given under para 1.3. and 1.4. in Annexure II.

3.2.4. Public comments received are broadly in agreement with the proposal. However, considering the aforementioned comments and to ensure that the MB carryout permitted activities as governed by MB Regulations, it is proposed that MBs may be allowed to undertake other than permitted activities through a separate entity or business unit. MBs may share their manpower and IT infrastructure with such entities on arm’s length basis without incurring any legal liability.

3.3. Proposal for consideration of the Board:

3.3.1. It is proposed that merchant bankers, other than Banks, PFIs and their subsidiaries, shall undertake only permitted activities related to securities market that come under the jurisdiction of SEBI, namely.

i. Managing of Public issues, Qualified Institutional Placements and Rights issues of securities; and advisory or consulting services incidental to such Public issues, Qualified institutional placements and Rights issues,

a. Managing of:

b. Acquisitions and Takeovers under Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 2011

c. Buyback under Securities and Exchange Board of India (Buy-back of Securities) Regulations 2018

d. Delisting under Securities and Exchange Board of India (Delisting of Equity Shares) Regulations, 2021

e. Scheme of arrangement under SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015

f. Implementation of Scheme under Securities and Exchange Board of India (Share Based Employee Benefits and Sweat Equity) Regulations, 2021

g. advisory or consulting services incidental to above mentioned activities.

iii. Underwriting activities as specified by the Board from time to time.

iv. Private Placement of listed or proposed to be listed securities on a stock exchange recognized by the Board and activities incidental thereto

v. Managing of International Offering of Securities and incidental advisory or consulting services to such offering.

vi. Filing of placement memorandum of alternative investment fund (AIFs).

vii. Issuance of fairness opinion

viii. Any other activity as may be specified by the Board, from time to time.

3.3.2. The registered MBs may carry on any other regulated activity only if it obtains a separate certificate of registration under the respective regulations made by the Board, other regulator or authority. Such regulated activities may be undertaken as a business unit of the entity, duly having the Chinese wall/ arm’s length basis with other business.

3.3.3. MBs (other than Banks and PFIs and their subsidiaries) shall be required to hive off those activities that are not regulated by any regulator or authority, to a separate legal entity, within a time period of two years. MBs may be allowed to share manpower and IT infrastructure on an arm’s length basis with the separate legal entity, without incurring legal liability on the MB. Failure to segregate such activities shall invite appropriate regulatory action.

4. MBs not to undertake valuation activities

4.1. Issues for consideration

4.1.1. There is no specific provision under MB Regulations that permits MBs to undertake valuation activity. However, MBs are permitted to undertake valuation under certain SEBI Regulations and other regulatory framework such as Income Tax Rules, Foreign Exchange Management (Non Debt-Instruments) Rules, IRDAI (Registration of Indian Insurance Companies) Regulations, 2022.

4.1.2. Section 247 of Companies Act, 2013 prescribes that valuation in respect of any property, stocks, shares, debentures, securities or goodwill or any other assets (herein referred to as the assets) or net worth of a company or its liabilities shall be valued by registered valuer.

4.1.3. SEBI has amended various SEBI Regulations such as SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 (“ICDR, 2018″), SEBI (Delisting of Equity Shares) Regulations, 2021, SEBI (Buy-back of Securities) Regulations, 2018 permitting valuation only by a Registered Valuer.

4.2. Analysis of Public Comments and rationale for recommendations:

4.2.1. The comments received from Public are broadly in agreement with the proposal. However, some have suggested to provide more time as against the proposal to give time period of six months to complete the existing assignments. The detailed comments are given under para 2.3. and 2.4. in Annexure II.

4.2.2. Considering the Public comments, there is a need to give more time to complete existing assignments.

4.2.3. There is a need to make it mandatory for valuation by Registered Valuer in other Regulations governed by SEBI.

4.3. Proposal for consideration of the Board:

4.3.1. MBs shall undertake valuation activities, provided it obtains a registration from the concerned regulator or authority.

4.3.2. While MBs shall not be permitted to undertake any new assignments w.r.t. valuation activities, without having a valid registration from the concerned regulator or authority. It is proposed to give a period of nine months to complete the existing assignments.

4.3.3. Consequential changes may be undertaken in the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 and SEBI (Share Based Employee Benefits and Sweat Equity) Regulations, 1992, such that valuation may be undertaken by a registered valuer.

5. Introduction of categorisation and review of net worth

5.1. Issues for consideration

5.1.1. At present, minimum net worth requirement for merchant banker is Rupees five crore. This threshold was revised in 1995 from rupees one crore in 1992.

5.1.2. While there is a need to increase the net worth requirement to align it with the current market vis-à-vis value in 1995, however, increasing net worth uniformly for all merchant bankers may not be suitable and average issue size on Main Board versus SME approach may be considered.

5.1.3. Merchant Bankers willing to have higher net worth and invest in infrastructure may be allowed to undertake all permitted activities, while other merchant bankers may be permitted to undertake all permitted activities other than main board public issues.

5.2. Analysis of Public Comments and rationale for recommendations:

5.2.1. The comments received from Public are broadly in agreement with the proposal. However, some have suggested that MB handling issuances of debt and hybrid securities may be permitted to seek registration in either category. The detailed comments are given under para 3.3 in Annexure II.

5.2.2. There is a merit in the suggestion and to provide more clarity, MBs may be permitted to handle issues of debt and hybrid securities under both the proposed categories.

5.2.3. The categorisation was proposed based on handling equity issuances on Main Board and SME. It may be prudent to have categorisation based on Equity Issuances and only Category 1 Merchant Banker may be permitted to handle Equity Issuances of Main Board.

5.3. Proposal for consideration of the Board:

5.3.1. Merchant bankers may be categorised into two categories based on net worth and activities to be undertaken, viz. Category 1 and Category 2.

Category 1 – Net worth not less than Rs. 50 crore and may undertake all permitted activities.

Category 2 – Net worth not less than Rs. 10 crore and may undertake all permitted activities except public issues of equity shares proposed to list on main board.

5.3.2. The existing merchant bankers shall be given a period of two years to increase their net worth progressively. The same shall be specified by way of a circular.

Category 1 – 1st year – Rs.25 crore and 2nd year – Rs. 50 crore Category 2 – 1st year – Rs.7.5 crore and 2nd year – Rs. 10 crore

5.3.3. MB who fails to meet the minimum net worth requirement, shall not undertake any fresh permitted activities, under MB Regulations, until the proposed net worth requirement is met.

6. Introduction of minimum liquid net worth.

6.1. Issues for consideration

6.1.1. Liquid net worth (‘LNW’) represents the net worth portion that can be easily converted into cash. At present, MB Regulations mandates MBs to maintain minimum net worth at all times, however, does not prescribe for maintaining liquid net worth. While net worth shows the financial soundness and economic stability of a MB, it may not reflect the funds that are readily available with the MB. MBs are required to underwrite the issues they handle under various SEBI Regulations. In the event of any devolvement of any of such issues, sufficient LNW would be required for MBs to fulfil the underwriting obligations.

6.2. Analysis of Public Comments and rationale for recommendations:

6.2.1. While the comments received from Public are broadly in agreement with the proposal, one commenter has suggested that instead of restriction on undertaking any of the permitted activities, if MB fails to maintain LNW, such restriction may be limited to the cases like hard underwriting where MB’s capital is exposed to risk. MB should remain free to undertake other activities that does not have any impact on its funds such as advisory services. The detailed comments are given under para 4.3. and 4.4. in Annexure II.

6.2.2. LNW plays a critical role in ensuring sound financial health, operational resilience and helps intermediaries to navigate through uncertainties, as it is readily available when the need arises. MBs may require LNW for the purpose of undertaking underwriting obligations under various SEBI Regulations. It is also to ensure that only serious players with adequate financial resources undertake permitted activities as a merchant banker.

6.3. Proposal for consideration of the Board:

6.3.1. It is proposed to allow a period of two years progressively to comply with the minimum liquid net worth requirement. The same shall be specified by way of circular.

6.3.2. It is proposed that the merchant banker shall maintain liquid net worth of at least 25 percent of the minimum net worth requirement, at all times, with the following glide path:

Category	Year 1	Year 2
Category 1	25%   of Rs. 25 crore = Rs.  6.25 crore	25% of Rs. 50 crore = Rs.12.5 crore
Category 2	25% of Rs. 7.5 crore = Rs. 1.875 crore	25% of Rs. 10 crore = Rs.2.5 crore

6.3.3. MBs who fail to maintain or meet the minimum liquid net worth requirement, shall not undertake any fresh permitted activities, under MB Regulations, until the proposed requirement is met.

7. Align the definition of net worth with Companies Act, 2013

7.1. Issues for consideration

7.1.1. The existing definition of ‘Net worth’ under MB Regulations needs to be aligned with Companies Act, 2013, ICDR, 2018, SEBI (Listing Obligations and Disclosure Requirement) 2015 to bring uniformity. The definition of Net worth as given under Companies Act, 2013 is as follows:

“Net Worth means the aggregate value of the paid-up share capital and all reserves created out of the profits and securities premium account and debit or credit balance of profit and loss account, after deducting the aggregate value of the accumulated losses, deferred expenditure and miscellaneous expenditure not written off, as per the audited balance sheet, but does not include reserves created out of revaluation of assets, write-back of depreciation and amalgamation”

7.1.2. Limited Liability Partnerships (‘LLPs’) are eligible for registration as MB. However, there is no definition of ‘Net worth’ for LLPs.

7.2. Analysis of Public Comments and rationale for recommendations:

7.2.1. The comments received from Public are broadly in agreement with the proposal. The detailed comments are given under para 5.3. in Annexure II.

7.3. Proposal for consideration of the Board:

7.3.1. It is proposed that definition of net worth for body corporates (other than LLPs) shall mean the same as prescribed in section 2(57) of Companies Act, 2013.

7.3.2. It is proposed to define net worth of LLPs as sum of Partner Contribution (Fixed) plus Reserves and Surplus.

8. Cancellation of registration of merchant banker not engaged in permitted activity

8.1. Issues for consideration

8.1.1. In order to ensure relevance of MB registration and encourage MBs to engage in permitted activities, there is a need to mandate MBs to earn minimum revenue from permitted activity under MB Regulations.

8.2. Analysis of Public Comments and rationale for recommendations:

8.2.1. The comments received from Public are broadly in agreement with the proposal However, there are few Public Comments stating that revenue depends on many factors, some of which are beyond the control of the MB such as financial crises, economic slowdowns or other extraordinary market disruptions. Revenue criteria as one of the conditions for maintaining the registration may not be warranted since they would be subject to minimum net worth and liquid net worth. Instead, actions for non-compliance with revenue criteria may be approached with caution and on a case-to-case basis, by taking into account the reasons for revenue shortfall beyond the control of MB (if any). One of the suggestions received is that the revenue model for debt market is different, the merchant bankers handling only debt / hybrid issuances (no other permitted activities) may be exempted from the proposed criteria. The detailed comments are given under para 6.3. and 6.4. in Annexure II.

8.2.2. It is considered prudent that MBs must earn a revenue of at least 50 percent of proposed net worth in three immediately preceding financial years from permitted activities in order justify their relevance of existence in securities market. The longer duration of three years is proposed considering the potential changes in the market cycle/business cycle.

8.2.3. The MB who fails to earn revenue within the stipulated time will be liable for cancellation of its registration. However, to deal with such cases, Summary Proceedings may be initiated.

8.2.4. There is a merit in the suggestion with regard to MBs handling debt and hybrid issuances exclusively and may be accepted as the revenue model for debt issuances is different.

8.3. Proposal for consideration of the Board:

8.3.1. The registration granted to a merchant banker may be cancelled, in the manner as specified by the Board, including initiating summary proceedings, if it fails to:

Category 1: Earn revenue of at least Rs.25 crore, on a cumulative basis, in three immediately preceding financial years from permitted activities under MB Regulations

Category 2: Earn revenue of at least Rs.5 crore, on a cumulative basis, in three immediately preceding financial years from permitted activities under MB Regulations

8.3.2. Merchant Bankers managing only the issue of listed/ to be listed Debt and Hybrid securities shall be exempted from complying with the aforementioned requirement.

9. Review of legal structures to be permitted for grant of registration

9.1. Issues for consideration

9.1.1. The existing definition of ‘body corporate’ under Companies Act, 2013 permits ‘body corporate incorporated outside India’ eligible for registration. There is an inherent challenge in supervision and enforcement for ‘body corporate’ incorporated outside India.

9.1.2. However, exception needs to be given to foreign banks licensed by RBI to undertake financial business in India.

9.1.3. Further, as per Sub-rule (6) of Rule 3 of The Companies (Incorporation) Rules, 2014, One Person Company (‘OPC’) cannot carry out Non-Banking Financial Investment activities including investment in securities of any body corporate.

9.2. Analysis of Public Comments and rationale for recommendations:

9.2.1. The comments received from Public are broadly in agreement with the proposal. The detailed comments are given under para 7.3. in Annexure II.

9.3. Proposal for consideration of the Board:

9.3.1. It is proposed that the following body corporates may not be eligible for grant of registration as merchant banker:

9.3.1.1. body corporates incorporated outside India, except foreign banks licensed by RBI to undertake financial business in India; and

9.3.1.2. One Person Company

10. Review of multiple merchant banking registrations within the same group:

10.1. Issues for consideration

10.1.1. Multiple merchant banking registrations within a group is not desirable from the perspective of institution building. Merchant bankers may use multiple registrations within a group as means to circumvent regulatory action/ enforcement. Single registration is also expected to streamline regulatory oversight.

10.1.2. Banks and Public Financial Institutions are under the regulatory purview of Reserve Bank of India. In order to manage overall risk and compliance, they may find it operationally convenient to segregate their capital market activities to a separate entity. Accordingly, it was suggested that Banks and PFIs may be permitted more than one registration within a group subject to the conditions as specified in the master circular dated September 26, 2023.

10.2. Analysis of Public Comments and rationale for recommendations:

10.2.1. The comments received from Public are broadly in agreement with the proposal. However, one commenter has said that for the overall development of market, multiple registration within a group may be allowed. The detailed comments are given under para 8.3 and 8.4 in Annexure II.

10.2.2. There is a merit in the comments made by few commenters. As per clause 3 of master circular dated September 26, 2023, SEBI may consider grant of certificate of registration to an applicant notwithstanding that another entity in the same group has been previously granted registration by the Board, if the conditions specified therein are fulfilled, i.e., the applicant is a separate legal entity, having independent board, arm’s length relationship and maintaining independent regulatory and supervisory mechanisms. Any action by way of suspension or cancellation of registration taken by SEBI against one entity, may entail action under regulation 35 of the Merchant Bankers Regulations 1992 against other entities of the same group.

10.2.3. SEBI has introduced proposals in respect of enhanced Net worth, requirement to maintain Liquid Net worth and achieve minimum revenue criteria. Looking at the new proposals, the suggestion to allow multiple registration within a group may be considered, provided that any restriction imposed by SEBI on one entity may entail on to the other entity/ies of the same group.

10.3. Proposal for consideration of the Board:

10.3.1. Based on the feedback received from pubic/ stakeholders, multiple registration within a group may be considered taking into consideration, the existing conditions and that any restriction imposed by SEBI on one entity may entail on to the other entity/ies of the same group.

11. Review of Minimum Underwriting Obligations

11.1. Issues for consideration

11.1.1. Regulation 22 of MB Regulations prescribes that an MB shall accept a minimum underwriting obligation of five percent of the total underwriting commitment or rupees twenty-five lacs, whichever is less. This Regulation is not in line with provisions under other SEBI Regulations. To illustrate,

11.1.1.1. Regulation 40 of ICDR, 2018 prescribes that the issuer shall enter into an underwriting agreement indicating therein the number of specified securities they shall subscribe to on account of rejection of applications.

11.1.1.2. Regulation 260(2) of ICDR, 2018 prescribes that merchant banker shall underwrite at least fifteen percent of issue size on their own account(s).

11.1.2. In view of the above, the existing provision in MB Regulations needs to be deleted and be replaced with an enabling provision for merchant bankers to undertake underwriting obligations.

11.2. Analysis of Public Comments and rationale for recommendations:

11.2.1. The comments received from Public are broadly in agreement with the proposal that MBs shall engage in underwriting activities as specified by the Board from time to time. The detailed comments are given under para 9.3. in Annexure II.

11.3. Proposal for consideration by the Board:

11.3.1. In order to align the underwriting obligations with other SEBI Regulations, Regulation 22 of MB Regulations shall be amended to state that merchant bankers shall undertake underwriting activities as specified by the Board.

12. Review of maximum underwriting threshold

12.1. Issues for consideration

12.1.1. The repealed SEBI (Underwriters) Regulations, 1993 (repealed vide amendment dated March 30, 2021) provided that the underwriting obligations shall not exceed 20 times of net worth. This clause was suitably incorporated as part of MB Regulations and SEBI (Stock Broker) Regulations, 1992.

12.1.2. Underwriting is primarily an activity wherein merchant bankers are required to subscribe to or procure subscription of unsubscribed securities. It is more relevant in less buoyant market conditions. Accordingly, it may be prudent to link threshold of underwriting with liquid net worth of the merchant banker.

12.1.3. In view of the above, the threshold for underwriting obligations may be prescribed at seven times of net worth or twenty times of liquid net worth, whichever is lower. Further, in order to allow merchant bankers to undertake higher underwriting obligations as a percentage of their liquid net worth, merchant bankers maintaining more than 35 percent of net worth as liquid net worth shall be allowed to undertake underwriting obligations of maximum twenty times of their liquid net worth.

12.2. Analysis of Public Comments and rationale for recommendations:

12.2.1. The comments received from Public are broadly in agreement with the proposal. However, there are submissions from public that underwriting should not be linked with liquid net worth of a merchant banker as the liquid net worth for a merchant banker is required only in case of hard underwriting and hard underwriting has become less relevant in the current market practices. The detailed comments are given under para 10.3. and 10.4. in Annexure II.

12.2.2. Funds that are part of the net worth, may not be readily available with the MB (for example, net worth in the form of fixed assets or loans or investments by the MB) when any of the issues managed by the MB devolves and MB is required to bring in funds to fulfil the underwriting obligations. Moreover, in SME issues, underwriting is mandatory for 100 percent size of the issue, out of which MBs shall underwrite 15 percent on their own account.

12.3. Proposal for consideration by the Board:

12.3.1. The underwriting threshold to be prescribed at 7 times of net worth or 20 times of liquid net worth, whichever is lower.

Provided, where the MB maintains more than 35 percent of its net worth as liquid net worth, the underwriting threshold may be 20 times of liquid net worth.

12.3.2. It is proposed to give a period of two years to comply with this requirement.

13. Merchant banker not to act in its own issue

13.1. Issues for consideration

13.1.1. Presently, there is no bar on MB to manage its own issue in ICDR, 2018. In order to avoid conflict of interest and ensure independent due diligence, MB may not be permitted to be appointed as lead manager in its own issue.

13.2. Analysis of Public Comments and rationale for recommendations:

13.2.1. The comments received from Public are broadly in agreement with the proposal. The detailed comments are given under para 11.3. in Annexure II.

13.3. Proposal for consideration of the Board:

13.3.1. MB shall not be permitted to manage its own issue.

14. Revision of threshold for ‘Associate of Issuer or Person’

14.1. Issues for consideration

14.1.1. Merchant banker shall be deemed to be an “associate of the issuer or person” wherein merchant banker or Issuer/person, directly or indirectly, have over fifteen percent of voting rights in the other.

14.1.2. Section 90 of the Companies Act, 2013 r/w the Companies (Significant Beneficial Owners) Rules, 2018 provides significant beneficial owner as person(s) who has not less than 10 percent of the shares/voting rights or right to receive dividend.

14.1.3. SEBI (Registrars to an Issue and Share Transfer Agents) Regulations, 1993), SEBI (Credit Rating Agencies) Regulations, 1999 and SEBI (Portfolio Managers) Regulations, 2020 provide the threshold of 10 percent of voting rights for the purpose of determination of an associate.

14.1.4. In order to bring alignment with other SEBI Regulations, the threshold is proposed to be reduced from 15 percent in MB Regulations to 10 percent of voting rights for the purpose of determination of an associate.

14.2. Analysis of Public Comments and rationale for recommendations:

14.2.1. The comments received from Public are broadly in agreement with the proposal. The detailed comments are given under para 11.3. in Annexure II.

14.3. Proposal for consideration of the Board:

14.3.1. The present threshold of 15 percent under Explanation (i) of Regulation 21A of shareholding/ voting rights may be reduced to 10 percent for the purpose of determining as an ‘Associate to an Issuer or Person’.

15. Directors, key personnel, Compliance Officer and their relatives not to hold securities in the issuer company

15.1. Issues for consideration

15.1.1. During processing of Initial Public Offer (IPO) documents, certain instances were observed, wherein the directors or key managerial personnel or compliance officer or employees referred to in clause (b) of Regulation 6 or their relative(s) were holding shares in the issuer company.

15.1.2. This may lead to conflict of interest and compromise due diligence, if such MB is handling the issue.

15.1.3. Presently, if the MB holds more than 15% in the issuer (proposed to be reduced to 10% of the issuer, in the extant Board memorandum) the MB can undertake marketing of the issue. Hence, a similar approach may be considered.

15.2. Analysis of Public Comments and rationale for recommendations:

15.2.1. The comments received from Public are broadly in agreement with the proposal. However, comments by few commenters suggest that the threshold should be kept at 2 percent instead of 0.1 percent of paid-up capital of the issuer as allowed for independent director in Companies Act, 2013. For the listed companies there is no feasible method to collect timely information on shareholding of persons who may not be financially dependent on the MB personnel. Commenters have also submitted that the said restriction should be made applicable only in case of public issues (where the MB conducts the due diligence) and not extend to other permitted activities. The detailed comments are given under para 12.3. and 12.4. in Annexure II.

15.2.2. While the threshold has been proposed in order to avoid potential conflict of interest that may arise because of such shareholding in the issuer, there is a merit in the suggestion that the proposed restriction should be made applicable only in case of Public Issues and not extended to other permitted activities, considering which, MBs may carry on all other permitted activities.

15.3. Proposal for consideration of the Board:

15.3.1. In case of public issues, the MB may be allowed to undertake the marketing of the issue only, with appropriate disclosure, if its directors or key managerial personnel or compliance officer or employees referred to in clause (b) of Regulation 6 or their relative(s), individually or in aggregate hold directly or indirectly, more than 0.1 percent of the issuer’s paid up share capital or nominal value of Rs. 10,00,000, whichever is lower.

However, holdings, if any, through mutual funds and ESOPs shall be excluded from the above.

15.3.2. The definition of “relative” shall include:

(i) spouse of the person;

(ii) parent of the person and parent of its spouse;

(iii) sibling of the person and sibling of its spouse;

(iv) child of the person and child of its spouse;

(v) spouse of the person listed at (iii); and

(vi) spouse of the person listed at (iv)

(vii) Hindu Undivided Family of the concerned person

16. Enhancing number of minimum personnel, experience and eligibility criteria

16.1. Issues for consideration

16.1.1. Regulation 6(b) of MB Regulations, mandates MB to employ minimum two persons with relevant experience.

16.1.2. Merchant Bankers are required to deal with complex transactions, which require knowledge and experience of multiple laws and industry practices. In view of the same, the minimum number of persons and experience for such persons employed by the MB needs to be enhanced.

16.1.3. For Category 1 merchant bankers, which have been entrusted to undertake main board public issues, minimum number of persons engaged in merchant banking should be increased, to have in its employment sufficient human resource with adequate level of knowledge, experience etc.

16.2. Analysis of Public Comments and rationale for recommendations:

16.2.1. The comments received from Public are broadly in agreement with the proposal. However, few commenters have said that present requirement for number of personal and experience is adequate and may be continued with. The detailed comments are given under para 13.3. and 13.4. in Annexure II.

16.2.2. SEBI has introduced proposals in respect of enhanced Net worth, requirement of Liquid Net worth and minimum revenue criteria. Looking at the new proposals, the existing provisions in the MB regulations that the applicant has in his employment minimum of two persons who have the experience to conduct the business of merchant banker, may be retained.

16.3. Proposal for consideration of the Board:

16.3.1. Based on the feedback received from pubic/ stakeholders, the present requirement for number of key personnel and their minimum years of experience, may be retained.

17. Qualification for Compliance Officer

17.1. Issues for consideration

17.1.1. Presently, no educational qualification has been prescribed for Compliance Officers, but they are required to obtain NISM Series III-A certification. As the Compliance Officer is responsible for monitoring and reporting of all legal and regulatory compliances, it is proposed to prescribe minimum qualification of Company Secretary (‘CS’) or law graduate, for compliance officer.

17.1.2. Presently the MB regulations do not cast any obligation to separate the post and role of compliance officer from other key personnel and principal officer. The Compliance Officer is responsible for ensuring that the MB is in compliance with the SEBI Act and the Regulations made thereunder. Further, in order to avoid any possible conflict of interest, the role of Compliance Officer should be exclusive and independent.

17.2. Analysis of Public Comments and rationale for recommendations:

17.2.1. The comments received from Public are broadly in agreement with the proposal. Public comments suggest including Chartered Accountant and MBA as eligible qualification to be compliance officer along with CS and law graduate. The detailed comments are given under para 14.3. and 14.4. in Annexure II.

17.3. Proposal for consideration of the Board:

17.3.1. It is proposed that Compliance Officer should have minimum qualification of Company Secretary or graduate degree in law from a university/ institution recognised by government.

17.3.2. Compliance Officer must have minimum work experience of at least two years post qualification in activities relating to corporate or secretarial compliance.

17.3.3. The Compliance Officer must have obtained the following NISM Certifications:

a. NISM-Series-IX: Merchant Banking Certification Examination

b. NISM-Series-IIIA: Securities Intermediaries Compliance (Non-Fund) Certification Examination

For existing Compliance Officers, a time period of one year may be given to obtain the abovementioned NISM certifications

17.3.4. The role of Compliance Officer shall be separate and independent from the role of key personnel as per Regulation 6(b) and Principal Officer.

17.3.5. The existing Merchant Bankers may continue provided, they comply with the requirements given at 17.3.1, 17.3.2 and 17.3.3 or they have professional qualification with a minimum five years of post-qualification work experience relating to corporate or secretarial compliance and have obtained the prescribed NISM certifications.

17.3.6. MB shall fill up the vacancy in the office of the Compliance Officer at the earliest and in any case not later than three months from the date of such vacancy. Further, merchant banker shall not fill such vacancy by appointing a person in interim capacity, unless such appointment is made in accordance with the laws applicable in case of a fresh appointment to such office and the obligations under such laws are made applicable to such person.

18. Experience of Principal Officer

18.1. Issues for consideration

18.1.1. Under the MB regulations, the role and responsibility of Principal Officer has not been defined. Further, considering the crucial role of Principal officer, minimum work experience be mandated so that only those personnel with requisite experience are designated for the said role.

18.2. Analysis of Public Comments and rationale for recommendations:

18.2.1. The comments received from Public are broadly in agreement with the proposal. The detailed comments are given under para 15.3.in Annexure II.

18.3. Proposal for consideration of the Board:

18.3.1. The Principal officer may be defined as –

“an employee of the merchant banker who has been designated as such by the merchant banker and is responsible for:

i. the decisions made by the merchant banker for the management or administration of merchant banking activity

ii. all other operations of the merchant banker”

18.3.2. Principal Officer to be mandated to have at least five years of experience in financial market.

18.3.3. Proposed timeline of one year to comply with the above requirement.

19. Other changes in MB Regulations

A. Power of the Board to issue clarifications

B. Proposal on penal provisions on failure of payment of renewal fees.

C. Merchant bankers not to undertake merchant banking activities without obtaining requisite registration from SEBI

D. NISM Certification by KMPs and Compliance Officer

E. Maintenance of books of account, records and other documents

F. Acquisition of shares prohibited

G. Information to the Board

H. Review of periodic report submitted by Merchant Bankers

I. Guidelines on Outsourcing of Activities by Intermediaries

J. Deletion of earlier redundant categorization and insertion of new categorization

K. Deletion of certain redundant provision of Regulation 13A

L. Modification of the definition of Banks/ PFIs under Regulation 13A

M. Consequential amendment to SEBI (Intermediaries) Regulations, 2008

19.1. Issues for consideration

19.1.1. There are certain regulations that require amendments to align them with other SEBI Regulations, make them more convenient and relevant to date such as power to remove difficulties, penalty for non­payment of fees, information to be submitted to the Board, maintenance of books of account by MBs etc. Further, based on suggestion received, it is proposed to delete the redundant provisions, reflect the current definition of the banks and PFIs and provide for summary proceedings under the SEBI (Intermediaries) Regulations, 2008, for violations of certain provisions of MB Regulations.

19.2. Analysis of Public Comments and rationale for recommendations:

19.2.1. The comments received from Public are broadly in agreement with the above proposals. The detailed comments are given under para 16.5, 16.9, 16.13, 16.17, 16.18, 16.22, 16.26, 16.32 and 16.36 in Annexure II.

19.3. Proposal for consideration of the Board:

A – An enabling clause to be introduced in MB Regulations stating “SEBI may issue circulars in order to remove any difficulties in respect of application or interpretation of MB Regulations.”

B – A penal interest at 15 percent p.a. for each month of delay or part thereof to be charged, in case of delay in payment of renewal fees by MBs and such MBs shall not undertake any new activity from the day such fees become due and remains unpaid. Further, SEBI may also initiate action as deemed fit for non-payment or delay in payment of renewal fees. It is proposed to introduce an appropriate clause in the MB Regulations.

C – A clause proposed to be introduced in MB Regulations stating that no person shall act as merchant banker, directly or indirectly, unless it has obtained a certificate of registration from the Board

D– MBs shall ensure that key personnel as per Regulation 6(b) and Compliance officer shall possess prescribed NISM Certifications prior to grant of registration for new applicants and within 90 days of appointment for existing MBs. It is proposed to introduce an appropriate clause in the MB Regulations.

E – MBs shall maintain books of accounts for at least eight years (in line with Companies Act, 2013) as against the existing requirement of five years. Further, MBs shall maintain data and information in India, as per the data storage and localization norms prescribed by Board from time to time.

F – It is proposed to modify the heading of Regulation 26 “Any transaction in shares” to “Any transaction is securities”. Further, Compliance officer shall also be included for prohibition of acquisition of securities in bodies corporate on the basis of price sensitive information obtained by them during the course of any professional assignment either from clients or otherwise.

G – MBs shall be advised to submit particulars of any transaction for acquisition of securities of any body corporate whose issue is being managed by the MB and particulars of any transactions for acquisition of securities made pursuance of underwriting or market making obligations as a part of half-yearly report to SEBI instead of quarterly basis. It is proposed to amend the MB Regulations.

H – The format of half-yearly report to be revised and the same is proposed to be prescribed by issuance of circular.

I – It is proposed to insert a provision in MB Regulations that MBs shall not be permitted to outsource its core activities, where the core activities shall include due diligence of issuer, preparation of offer documents and any other activities as specified by the Board from time to time

J – It is proposed to delete the earlier categorization I, II, III and IV under Regulation 3(2) of MB Regulations and insert proposed categorization Category 1 and 2 appropriately. Further, existing reference to portfolio manager (PMs) shall be deleted as there exists separate regulations for PMs.

K – It is proposed to delete the following redundant portion of the Regulation 13A:

“…under these regulations shall [after June 30, 1998] carry on….”

“Not withstanding anything contained above, a merchant banker who prior to the date of notification of the Securities and Exchange Board of India (Merchant Bankers) Amendment Regulations, 1997, has entered into a contract in respect of a business other than that of the securities market may, if he so desires, discharge his obligations under such contract:”

L – Definition of Banks/ Public Financial Institutions (PFIs) under Regulation 13A to be modified to reflect the current definition.

M- Consequential amendments may be carried out in the Securities and Exchange Board of India (Intermediaries) Regulations, 2008, for inclusion of the following non-compliances under the summary proceedings, namely, not meeting the proposed criteria of minimum net worth, minimum liquid net worth, minimum revenue from permitted activities and failure to segregate activities other than permitted activities.

20. Proposal for consideration of the Board:

20.1.1. The Board is requested to consider and approve the proposals mentioned under paras 3.3, 4.3, 5.3, 6.3, 7.3, 8.3, 9.3, 10.3, 11.3, 12.3, 13.3, 14.3, 15.3, 16.3, 17.3, 18.3 and 19.3. The draft regulations are placed at Annexure- III.

20.1.2. The proposed amendments shall come into force thirty days from the date of their publication in the official gazette.

20.1.3. The Board is requested to consider and approve the proposals as contained in the Memorandum and authorize the Chairperson to make consequential and incidental changes and take necessary steps to give effect to the decisions of the Board.

Enclosure:

1. Annexure I (34 pages)

2. Annexure II (33 pages)

3. Annexure III (28 pages)

Annexure I

(Consultation Paper is available on SEBI Website)

Annexure II

Existing provisions, Recommendations of PMAC and Proposal wise analysis of Public Comments

1. Review of activities that merchant bankers can undertake.

1.1. Existing provisions

1.1.1. Regulation 2(ca) of MB Regulations states ‘issue’ means “an offer of sale or purchase of securities by any Body Corporate, or by any other person or group of persons on its or his or their behalf, as the case may be, to or from the public, or the holders of securities of such body corporate or person or group of persons through a merchant banker”.

1.1.2. Regulation 2(cb) of MB Regulations states ‘merchant banker’ means “any person who is engaged in the business of issue management either by making arrangements regarding selling, buying or subscribing to securities or acting as manager, consultant, adviser or rendering corporate advisory service in relation to such issue management.”

1.1.3. Regulation 13A of MB Regulations states “No merchant banker, other than a Bank or a Public Financial Institution, who has been granted a certificate of registration under these regulations shall carry on any business other than that in the securities market… ,as the case may be”

1.1.4. Relevant extract from Para 2 of Master Circular on Merchant Bankers (RMB CIRCULAR NO. 1(98-99) dated June 05, 1998) (“June 1998 circular”) states “Activities that Merchant Bankers can undertake: With effect from July 01, 1998, a merchant banker shall undertake only those activities which are relating to securities market and which do not require registration/ granted exemption from registration as an NBFC from RBI. In particular, a merchant banker may undertake the following activities:

i. Managing of Public Issue of Securities.

ii. Underwriting connected with the aforesaid Public Issue Management Business

iii. Managing/advising on International Offerings of Debt/Equity i.e. GDR, ADR, bonds and other instruments

iv. Private Placement Securities

v. Primary or Satellite dealership of Government Securities

vi. Corporate Advisory Services related to Securities Market e.g. take­overs, acquisitions, Disinvestment.

vii. Stock-broking

viii. Advisory services for Projects

ix. Syndication of rupee term loans

x. International Financial Advisory Services

1.2. Recommendation of the PMAC

1.2.1. The PMAC has recommended inter-alia to permit MBs to undertake services relating to private placement of unlisted securities. The PMAC also recommended that MBs may be permitted to undertake activities such as primary dealership, portfolio manager services with requisite approval from respective Regulator.

1.3. Public Comments and Analysis

1.3.1. The responses received on the proposals made in the Consultation Paper are summarized below:

Proposal in the Consultation Paper		Total comments	No. of Comments in agreement	No. of Comments in partial agreement	No. of Comments in dis­agreement
1.	Merchant Bankers, other than banks, public financial institutions and its  subsidiaries,  hall undertake  only shall undertake only  those activities, which  are related  to   securities market. Such activities have been defined as ‘permitted activities’.	58	9	10	39
2.	Merchant Bankers, other than banks, public financial institutions and its subsidiaries, shall be required  to    segregate the activities other than permitted activities to a separate entity within a period of two years from date specified by SEBI.	49	10	11	28
3.	Activities that require separate  regulatory registration / license and activities that do not pertain to securities market  may  not be permitted under the SEBI (Merchant Bankers)   Regulations, 1992	43	15	12	16
4.	In case an entity wishes to carry on any other regulated securities market activity such as stock broker, portfolio manager, primary dealership of Government securities, it may  do  so after obtaining     registration/ license    from the regulatory authority.	40	27	5	8

1.4. Summary of Public Comments

1.4.1. MBs should be allowed to undertake activities in unlisted companies. MBs provide services to support a company throughout its evolution i.e., from its various rounds of private equity fund raising to preparing it for IPO and then lead managing the IPO and continuing to help the client in its journey as listed entity, thereby developing long-term client relationships.

1.4.2. There are more than 50 lakh unlisted corporates that require strategic advices on their growth trajectory.

1.4.3. For certain transactions, such as merger/ acquisitions relating to a material subsidiary of a listed entity, such categorization into listed or unlisted space is neither feasible nor desirable.

1.4.4. A transaction, which may originate as a regulated activity may eventually turn into a transaction not within the remit of the proposed activities. For example, a transaction, which initially expected to trigger open offer, is restructured or downsized such that it eventually turns into a private placement not triggering an open offer. To avoid any disruption for the client, the same team of merchant banker should continue throughout the transaction lifecycle else it would not only cause disruption but also increase the complexities of repapering the documentation with such clients

1.4.5. It must be noted that in the formative stage, companies need private fund raising to grow where Merchant Bankers assist them and provide them the necessary impetus to grow the business and also make them market ready at an opportune time. There are no instances of any systemic risks being posed to the Merchant Banking sector through this model as there is no underwriting liability in such transactions pertaining to unlisted securities.

1.4.6. A separate category of MB should be introduced who shall operate in Non-Convertible Securities (‘NCS’) markets. As equity and debt are two distinct products, a one-size-fits-all approach may not be effective for MBs managing debt as well as equity issues. If a separate category for MBs operating in NCS markets is not feasible, MBs acting as arrangers to private placement of NCS issues should be allowed to (i) underwrite, commit, bid, subscribe and invest in private placement of NCS and (ii) subsequently engage in sale and purchase of such NCS out of their net worth and/or borrowed funds for undertaking market making activities which will enhance liquidity of otherwise thinly traded NCS.

1.4.7. The proposal would result in incurring additional operational costs and compliance obligations for merchant bankers, without a corresponding increase in revenue. This is not aligned with Government’s objective of fostering ease of doing business.

1.4.8. Given that some merchant bankers have investments from foreign entities, segregating business activities into a separate entity which is not regulated by SEBI or any other financial sector regulator will require Government approval under FEMA. In case of any inability/delay in obtaining such approvals, the possibility of loss in business/ shareholder value cannot be completely ruled out.

1.4.9. This division will lead to inefficiencies and adversely impact client service, especially our global clients who do not face these restrictions in other developed markets relationships. The same client will be required to go to different entities for pre-IPO and post-IPO advisory services, thereby disrupting client journey, and contributing no value-addition from either a client or a merchant banker perspective

1.5. Analysis of Comments

1.5.1. MBs are undertaking activities with respect to unlisted companies, which are not under the purview of SEBI. Undertaking such activities, which are not monitored or supervised, may result in regulatory and systemic risk in the securities market. Further, any obligations arising from such unmonitored/ unregulated activities may negatively impact/ erode net worth of the MB.

1.5.2. Hence, MBs may undertake such activities related to unlisted companies through a separate legal entity. As a mitigating factor, MB may be allowed to share infrastructure with the separated entity by way of an agreement at arm’s length basis, without inviting legal liability on the MB. However, the MB, itself, shall only undertake ‘permitted activities’ such as :

i. Managing of Public issues, Qualified Institutions Placements and Rights issues of securities; and advisory or consulting services incidental to such Public issues, Qualified institutions placements and Rights issues,

ii. Managing of:

a. Acquisitions and Takeovers under SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011

b. Buyback under SEBI (Buy-back of Securities) Regulations 2018

c. Delisting under SEBI (Delisting of Equity Shares) Regulations, 2021

d. Scheme of arrangement under SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015

e. Implementation of Scheme under SEBI (Share Based Employee Benefits and Sweat Equity) Regulations, 2021

f. any other activity as permitted under respective SEBI Regulations advisory or consulting services incidental to abovementioned activities.

iii. Underwriting of securities as permitted under applicable SEBI Regulations

iv. Private Placement of securities that are listed or proposed to be listed on a stock exchange recognized by the Board and activities incidental thereto

Explanation: For the purpose of this Regulation, the securities shall be treated as ‘proposed to be listed’ from the date of approval of the Board Resolution of the issuer, for the issuance of such securities to be listed on a stock exchange.

v. Managing of International Offering of securities and incidental advisory or consulting services to such Offering.

vi. Filing of placement memorandum of AIFs.

vii. Issuance of fairness opinion

viii. Any activity specified by the Board, from time to time, that requires the services of a merchant banker.

2. MBs not to undertake valuation activities

2.1. Existing provisions:

2.1.1. Currently, there is no specific prescription given under MB Regulations with respect to MBs undertaking valuation activities.

2.1.2. However, Merchant Bankers are permitted to carry out valuation activity under SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (‘SAST Regulations’) and SEBI (Share Based Employee Benefits and Sweat Equity) Regulations, 2021 (“SBEB and SE Regulations”).

2.1.3. MBs also undertake valuation, under the following laws administered by other Regulators/ Authorities as follows:

(a) Rule 11UA of Income Tax Rules, 1962;

(b) Rule 21 / Sch II of FEM (NDI) Rules, 2019;

(c) 6 (3) of IRDAI (Registration of Indian Insurance Companies) Regulations, 2022 and

(d) NHB’s RFP Reference No. NHB/MRCPD/RFP–Equity Valuation/2021

2.2. Recommendation of the PMAC

2.2.1. The Committee recommended that merchant bankers may not be permitted to undertake valuation related activities.

2.3. Public Comments and Analysis

2.3.1. The responses received on the proposals made in the Consultation

Paper are summarized below:

Proposal in the Consultation Paper		Total comments	No. of Comments in agreement	No. of Comments in partial agreement	No. of Comments in dis­agreement
5.	Merchant Bankers shall not undertake valuation except as specified by SEBI.	50	17	11	22
6.	Merchant Bankers shall be given time period of 6 months to complete existing assignments related to valuation.	32	9	5	18

2.4. Summary of Public Comments

2.4.1. In order to ensure a smooth transition, merchant bankers should be allowed to complete existing assignments towards fulfilment of their contractual obligations in terms of the client engagement agreement, without mandating a specific time period for completion. Accordingly, the proposal should be modified to specify that the merchant bankers will not be allowed to undertake any new valuation assignment from the date of applicability of such proposal, unless otherwise specified by SEBI.

2.4.2. Extension of time period from the proposed 6 months is required to ensure smooth transition.

2.5. Analysis of Comments

2.5.1. In view of the public comments received, a time period of nine months as against six months may be given to complete the existing assignments.

3. Introduction of categorisation and review of net worth

3.1. Existing provisions.

3.1.1. Regulation 6(d) read with Regulation 7 read with Regulation 9(d) of MB Regulations requires MBs to maintain net worth of not less than five crore rupees, at all times.

3.1.2. Regulation 3(2A)(i) of MB Regulations provides that MB registration shall be granted only under Category I.

3.2. Recommendation of the PMAC

3.2.1. Committee recommended that the net worth needs to be revised to ensure entities with adequate net worth can only be eligible as merchant bankers.

3.2.2. The committee recommended that net worth of Rs. 50 crores would be commensurate considering the roles and importance of merchant bankers. Further, a MB not undertaking main board public issues can be mandated to maintain net worth of Rs. 10 crores.

3.3. Public Comments and Analysis

3.3.1. The responses received on the proposals made in the Consultation Paper are summarized below:

Proposal in the Consultation Paper		Total comments	No. of Comments in agreement	No. of Comments in partial agreement	No. of Comments in dis­agreement
7.	Merchant bankers may be categorized into two categories based on networth and activities. Category 1, having Net worth not less than ₹ 50crores, shall  be permitted to undertake all  permitted   activities. Category 2 having net worth not less than ₹ 10 crores,  shall be permitted to undertake all    permitted activities except Main Board Issues	48	22	16	10
8.	The existing merchant bankers shall be given a glide path of two years from a date specified by SEBI to increase the net worth	38	28	8	2
9.	Updation in the categorization  of Merchant Bankers may be done with prior approval of the SEBI	34	30	2	2
10.	Merchant Bankers who fail to  meet the minimum net  worth requirements shall not undertake any activity until the proposed net worth   requirement     is met.	36	29	5	2

3.4. Public Comments

3.4.1. The public comments are broadly in agreement with the proposals mentioned in the consultation paper

4. Introduction of minimum liquid net worth.

4.1. Existing provisions:

4.1.1. Under the present regulatory framework, there is no provision in this regard.

4.2. Recommendation of the PMAC

4.2.1. The PMAC recommended that minimum net worth may be introduced to ensure that MBs have sufficient funds to meet any unexpected uncertainties.

4.3. Public Comments and analysis

4.3.1. The responses received on the proposals made in the Consultation Paper are summarized below:

Proposal in the Consultation Paper		Total comments	No. of Comments in agreement	No. of Comments in partial agreement	No. of Comments in dis­agreement
11.	Introduction of  minimum liquid net worth  to be maintained by merchant banker.	43	17	15	11
12	Glide path of two years to comply with minimum liquid net worth requirement.	37	27	5	5
13.	Restriction on merchant bankers to undertake permitted activities, if it fails to maintain minimum liquid net worth.	35	18	6	11

4.4. Summary of Public Comments

4.4.1. In the event the MB has capped out the liquid net worth/assets as mandated, as opposed to having a complete restriction on undertaking any permitted activity, such restriction should be limited to the cases that put the MBs capital at risk, such as cases of hard underwriting where merchant banker exposes itself to a subscription risk. Merchant bankers should remain free to continue to do other activities that don’t put the capital as such at risk, such as M&A or any other kind of financial advisory.

4.5. Analysis of Comments

4.5.1. Liquid net worth plays a critical role in ensuring sound financial health, operational resilience and helps intermediaries navigate through uncertainties, as it is readily available when need arises. It has been proposed to introduce liquid net worth as an entry barrier so that serious MBs with adequate financial resources are eligible.

4.5.2. It is observed from some of the applications received for MB registration that though the net worth requirement is fulfilled as per books, the funds that are part of the net worth are diverted by way of loans and advances and accounting jugglery. The applicant company is left with no liquid net worth to meet the unforeseen financial obligations/ uncertainties. This exposes the MB to uncertain/ unforeseen risk like underwriting devolvement.

5. Align the definition of net worth with Companies Act, 2013

5.1. Existing provisions

5.1.1. Regulation 6(d) r/w Regulation 7 r/w Regulation 9(d) of MB Regulations requires MBs to maintain net worth of not less than five crore rupees, at all times.

5.1.2. Explanation to Regulation 7 of MB Regulations defines net worth as sum of paid up capital and free reserves.

5.1.3. Section 2(1) (s) of SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (‘LODR’) refers to Companies Act, 2013 for the definition of net worth

5.1.4. Section 2(1) (hh) of SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 (‘ICDR’) defines net worth, similar to the definition of net worth as per the Companies Act, 2013

5.2. Recommendation of the PMAC

5.2.1. The committee recommended that the definition of net worth may be aligned with definition of ‘net worth’ as per section 2(57) of Companies Act, 2013.

5.3. Public Comments and analysis

5.3.1. The responses received on the proposals made in the Consultation Paper are summarized below:

Proposal in the Consultation Paper		Total comments	No. of Comments in agreement	No. of Comments in partial agreement	No. of Comments in dis­agreement
14.	To align the definition of net worth under SEBI (Merchant Bankers) Regulations, 1992 with definition of net worth as per Companies Act, 2013.	37	36	1	0
15.	To provide for definition of net worth for Limited Liability Partnerships.	31	31	0	0

5.4. Public Comments

5.4.1. The public comments are broadly in agreement with the proposals mentioned in the consultation paper.

6. Cancellation of registration of merchant banker not engaged in permitted activity

6.1. Existing provisions

6.1.1. Under the present regulatory framework, there is no provision in this regard.

6.2. Recommendation of the PMAC

6.2.1. The Committee recommended that in order to encourage MBs to undertake “ Permitted Activities” and ensure registration is held by entities that intend to engage in merchant banking business, a minimum amount of revenue from “SEBI permitted activity” may be mandated.

6.3. Public Comments and Analysis

6.3.1. The responses received on the proposals made in the Consultation Paper are summarized below:

Proposal in the Consultation Paper		Total comments	No. of Comments in agreement	No. of Comments in partial agreement	No. of Comments in dis- agreement
16.	16.Cancellation of Merchant Banking registration if it does not earn requisite revenue from permitted activities.	52	12	8	32

6.4. Summary of Public Comments

6.4.1. Prescribing any revenue criteria for maintaining registration is unprecedented by any regulatory authority. Revenue is a function of many considerations e.g. market forces, business cycles etc. Hence, revenue criteria should not be incorporated.

6.4.2. The current proposal may be tweaked to be an enabling provision that allows SEBI to consider suspension or in extreme cases cancellation of licenses, on a case-by-case basis, where it believes that the merchant banker has not engaged sufficiently in issue management activities, as opposed to having a stringent requirement to earn requisite revenue from permitted activities for maintenance of merchant banking registration. For such purposes, SEBI should also take into consideration that if the non-compliance of maintaining the minimum revenue requirement is on account of factors beyond the control of the MB. In addition, a provision may also be included that allows SEBI to grant relaxation or exemption for certain period, where there may be a technical non-compliance of maintaining minimum revenue requirement on account of factors beyond the control of the entity as specified above.

6.4.3. The imposition of such revenue-based obligation, with the consequent risk of license cancellation for non-compliance, could incentivize market participants to engage in transactions that they might otherwise avoid. This unintended consequence could introduce a risk to market integrity, as entities may be driven to accept deals to avoid the severe penalty of losing their license. Further, even in most developed markets, the practice of linking cancellation of registration upon not earning requisite revenue from permitted activities is not prevalent.

6.4.4. It is the concern of the regulator that some of the MBs are not engaged in the activities of Issue Management and permitted activities, so their registration should be discontinued. This concern of regulator can be resolved by introducing volume-based criteria or number of assignment based criteria. Large Size borrowers in the Private Placement Debt Markets may not pay any fees or pay very minimum fees. The standard of fees revenue in Debt Market is much lower than in Equity Market. Under such a scenario the MBs who are not doing IPO or Equity Market related activity and only focused on Debt Market should be assessed either preferably on volume-based criteria or on participation in the number of Assignments.

6.5. Analysis of Comments

6.5.1. The proposed net worth requirement for MBs is Rs. 50 crores and Rs.10 crores for Category 1 and Category 2 respectively. It is considered economical that MBs must earn a cumulative revenue of at least 50% of proposed net worth in three immediately preceding financial year from MB activity in order justify their relevance in securities market.

6.5.2. The longer duration of three years has been proposed considering the potential changes in the market cycle. The MB who fails to earn revenue within the stipulated time may be liable for cancellation of its registration. However, the procedure for such cancellation may be dealt with, through the Summary Proceedings also.

6.5.3. Since the fee charged by MBs for handling debt and hybrid issuances is much lower than in equity market, exemption may be given to those

MBs who exclusively handle debt and hybrid issuances.

7. Review of legal structures to be permitted for grant of registration

7.1. Existing provisions

7.1.1. Regulation 6(a) of MB Regulations states:

“the applicant shall be a body corporate other than a non-banking financial company as defined under clause (f) of section 45-I of the Reserve Bank of India Act, 1934 (2 of 1934), as amended from time to time

Provided that the merchant banker who has been granted registration by the Reserve Bank of India to act as a primary or satellite dealer may carry on such activity subject to the condition that it shall not accept or hold public deposit”

7.1.2. As per Regulation 2(1)(aa) of MB Regulations, “body corporate” shall have the meaning assigned to it in or under clause (11) of section 2 of the Companies Act, 2013. The same has been reproduced for ready reference –

2.(11) of the Companies Act, 2013, “body corporate” or “corporation” includes a company incorporated outside India, but does not include-

(i) a co-operative society registered under any law relating to co­operative societies; and

(ii) any other body corporate (not being a company as defined in this Act), which the Central Government may, by notification, specify in this behalf;

7.2. Recommendation of the PMAC

7.2.1. Given the concerns regarding supervision and enforcement for ‘body corporate incorporated outside India’, PMAC recommended that such entities should not be eligible for MB registration. However, PMAC recommended that foreign banks licensed by RBI to undertake financial business may be permitted for MB registration.

7.2.2. PMAC further recommended that since One Person Company are not permitted to carry out Non-Banking Financial Investment activities including investment in securities of any body corporate, they may be restricted to be eligible for MB registration.

7.3. Public Comments and Analysis

7.3.1. The responses received on the proposals made in the Consultation Paper are summarized below:

Proposal in the Consultation Paper		Total comments	No. of Comments in agreement	No. of Comments in partial agreement	No. of Comments in dis­agreement
17.	Body corporates incorporated   outside   India (except      foreign  banks licensed by RBI) shall not be eligible         for  grant of registration  with   SEBI as Merchant Banker.	32	31	1	0
3.	One person  Companies shall not be eligible for grant of registration with SEBI as Merchant Banker.	25	25	0	0

7.4. Public Comments

7.4.1. The public comments are broadly in agreement with the proposals mentioned in the consultation paper.

8. Review of multiple merchant banking registration within the same group

8.1. Existing provisions

8.1.1. Regulation 6(c) of MB Regulations relating to criteria for grant of MB registration provide that ‘a person directly or indirectly connected with the applicant has not been granted registration by the Board.

8.1.2. Explanation: For the purposes of this clause the expression “directly or indirectly connected” means any person being an associate, subsidiary or inter-connected or group company of the applicant in case of the applicant being a body corporate;

8.1.3. SEBI, vide para 3 of Master Circular for MBs dated September 26, 2023 (previously RMB Circular no.1 (2002-2003) dated September 17, 2002), has clarified that

“the Board may consider grant of certificate to an applicant, notwithstanding that another entity in the same group has been previously granted registration by the Board, if the following conditions are fulfilled:

a. The entities are incorporated as separate legal entities.

b. The entities have independent Board of Directors. Independent Board of Directors for this purpose means that common directors should not be in majority in both the Boards.

c. There is absolute arm’s length relationship with reference to their operations.

d. The key personnel and infrastructure are independently available for each entity.

e. Each entity has independent regulatory controls and supervisory mechanism.”

8.2. Recommendation of the PMAC

8.2.1. Upon deliberations, PMAC observed that the circular is in contravention to the existing Regulation. Further, there is a possibility of misuse and circumvention of Regulations, where there are multiple MB registrations within the same group. In view of the same, PMAC recommended that MBs, other than Banks, PFI and their group companies, may ensure single registration within the same group.

8.3. Public Comments and Analysis

8.3.1. The responses received on the proposals made in the Consultation Paper are summarized below:

Proposal in the Consultation Paper		Total comments	No. of Comments in agreement	No. of Comments in partial agreement	No. of Comments in dis­agreement
19.	Merchant bankers, other than  Banks  and Public Financial Institution  and their group companies, shall ensure that there is single registration within the same group.	39	28	7	4
20.	Time period of one year shall be given to existing merchant banker to comply.	31	27	1	3
21.	Certain conditions  to be fulfilled by  Banks,  Public Financial Institutions and their group companies who have more than  one     merchant banker registration within the same group.	29	24	2	3

8.4. Public Comments

8.4.1. The public comments are broadly in agreement with the proposals mentioned in the consultation paper. However, one commenter has said that, with the maturing market capitalization and increase in inflow of FIIs and retail participation, the number of public issues have been manifold in the past few years. The current proposal would reduce the number of MBs in the market, which would in-turn raise the cost of listing.

8.5. Analysis of Comments

8.5.1. Considering the view of public and the fact that there are new proposals introduced in respect of enhanced net worth, requirement to maintain liquid net worth and minimum revenue criteria to ensure quality intermediation, multiple registration within a group may be allowed subject to certain conditions.

8.5.2. The conditions are presently specified under clause 3 of master circular dated September 26, 2023 such as the applicant is a separate legal entity, having independent board, arm’s length relationship and maintaining independent regulatory and supervisory mechanisms.

8.5.3. Further, any restriction or action imposed by SEBI against one entity, may entail action under regulation 35 of the Merchant Bankers Regulations 1992 against other entities of the same group.

9. Review of Minimum Underwriting Obligations

9.1. Existing provisions

9.1.1. Regulation 22 of MB Regulations requires that, in case of every issue managed; the lead merchant banker shall accept a minimum underwriting obligation of five per cent of the total underwriting commitment or twenty-five lacs rupees, whichever is less.

9.1.2. Regulation 40 of ICDR Regulations, inter-alia, prescribes

9.1.3. Wherein issuer is making an IPO, other than book building, then issuer shall prior to filing of prospectus, enter into underwriting agreement for maximum number of shares to be subscribed or number of shares to be subscribed pursuant to rejection of applications.

Wherein issuer is making a public issue through book building process, the issuer shall prior to filing of prospectus enter in to underwriting agreement.

Regulation 260(2) of ICDR, 2018 prescribes that merchant banker shall underwrite at least fifteen percent of issue size on their own account(s).

9.2. Recommendation of the PMAC

9.2.1. PMAC recommended that since the requirement of minimum underwriting is redundant, the same needs to be reviewed. The same needs to be aligned with the respective SEBI Regulations.

9.3. Public Comments and Analysis

9.3.1. The responses received on the proposals made in the Consultation Paper are summarized below:

Proposal in the Consultation Paper		Total comments	No. of Comments in agreement	No. of Comments in partial agreement	No. of Comments in dis­agreement
22.In	order to align the underwriting obligations with  EBI’s  regulatory  requirement’s,             merchant Bankers     shall    engage  in underwriting    activities   as specified by Board from time to time.	42	25	13	4

9.4. Public Comments

9.4.1. The public comments are broadly in agreement with the proposals mentioned in the consultation paper

10. Review of maximum underwriting threshold

10.1. Existing provisions

10.1.1. Regulation 2(h) of MB Regulations defines ‘underwriting’ as an ‘agreement to subscribe to or procure subscription for securities, issued or offered for sale, remaining unsubscribed’

10.1.2. Regulation 22(B) of MB Regulations prescribes that at any point of time, the total underwriting obligations by an MB, under all the agreements, shall not exceed twenty times of the net worth of the Merchant Banker.

10.2. Recommendation of the PMAC

10.2.1. Upon deliberation, the PMAC recommended that the threshold for maximum underwriting obligations may be linked to liquid net worth maintained by the MB.

10.3. Public Comments and Analysis

10.3.1. The responses received on the proposals made in the Consultation Paper are summarized below:

Proposal in the Consultation Paper		Total comments	No. of Comments in agreement	No. of Comments in partial agreement	No. of Comments in dis­agreement
23.	The underwriting threshold to beprescribed at 7 times of net worth or 20 times of liquid net worth, whichever is lower. Provided, where the merchant banker  maintains    more   than 35% of its net worth as liquid net worth, it may be eligible for 20 times of liquid net worth.	43	12	7	24

10.4. Summary of Public Comments

10.4.1. The underwriting obligations should not be linked with liquid net worth of a merchant banker as the liquid net worth for a merchant banker is required only in case of hard underwriting and hard underwriting has become less relevant in the current market practices. Further, such requirement hinders the capacity of a merchant banker to manage and underwrite large-scale transactions effectively. In view of the above, the underwriting threshold shall be at the existing limit i.e., 20 times of the net worth.

10.4.2. 20 times liquid net worth requirement may not be suitable for all type of issues. Particularly, NCS issues carry significantly lower market risks compared to equity issuances. Therefore, capping underwriting at 20 times of liquid net worth may not be warranted for NCS issues.

10.5. Analysis of Comments

10.5.1. Underwriting is primarily an activity wherein merchant bankers are required to subscribe to or procure subscription of unsubscribed securities. Current provision links the underwriting threshold to the net worth of the merchant banker.

10.5.2. However, funds that are part of the net worth may not be readily available with the merchant banker (for example, net worth in the form of fixed assets or loans or investments by the merchant banker) when any of the issues devolve and merchant banker is required to bring in funds to fulfil the underwriting obligations.

10.5.3. Moreover, in SME issues, 100% underwriting is mandatory for the merchant bankers, out of which 15% to be brought by their own accounts

10.5.4. Thus, linking the underwriting threshold to the liquid portion of the net worth would be more relevant as this ensures that the merchant banker is ready to fulfil underwriting obligation when an issue is devolved.

11. Merchant banker not to in its own issue and Revision of threshold for ‘Associate of issuer or person’

11.1. Existing provisions:

11.1.1. Regulation 21A of MB Regulations is reproduced here as under “21A – Merchant banker not to act as such for an associate (1) A merchant banker shall not lead manage any issue or be associated with any activity undertaken under any regulations made by the Board, if he is a promoter or a director or an associate of the issuer of securities or of any person making an offer to sell or purchase securities in terms of any regulations made by the Board:

Provided that a merchant banker who is an associate of such issuer or person may be appointed, if he is involved only in the marketing of the issue or offer.

Explanation: For the purposes of this regulation, a merchant banker shall be deemed to be an “associate of the issuer or person” if

(i) either of them controls, directly or indirectly through its subsidiary or holding company, not less than fifteen per cent. of the voting rights in the other; or

(ii) either of them, directly or indirectly, by itself or in combination with other persons, exercises control over the other; or

(iii) there is a common director, excluding nominee director, amongst the issuer, its subsidiary or holding company and the merchant banker”

11.2. Recommendation of the PMAC

11.2.1. Upon deliberation, PMAC recommended that MBs shall not be appointed as lead manager in its own issue. Further, the PMAC recommended that the threshold of 15% of voting rights needs to be revised to 10%.

11.3. Public Comments and Analysis

11.3.1. The responses received on the proposals made in the Consultation Paper are summarized below:

Proposal in the Consultation Paper		Total comments	No. of Comments in agreement	No. of Comments in partial agreement	No. of Comments in dis­agreement
24.	Merchant Banker shall not be permitted to manage its own issue.	34	32	1	1
25.	The present threshold of 15% of shareholding/ voting rights may be reduced to 10%    for the purpose of treating   a     MB as  an ‘Associate to an Issuer’	33	29	1	3

11.4. Public Comments

11.4.1. The public comments are broadly in agreement with the proposals mentioned in the consultation paper

12. Directors, key personnel, Compliance Officer and their relatives not to hold securities in the issuer company

12.1. Existing provisions

12.1.1. Under the present regulatory framework, there is no provision in this regard.

12.2. Recommendation of the PMAC

12.2.1. The proposal was deliberated with respect to possible conflict of interest and PMAC has agreed that there should be restriction on mandate acceptance when such persons of MB holds securities in the issuer. However, PMAC has suggested that the threshold may kept at 2 percent of the issuer paid up capital.

12.3. Public Comments and Analysis

12.3.1. The responses received on the proposals made in the Consultation Paper are summarized below:

Proposal in the Consultation Paper		Total comments	No. of Comments in agreement	No. of Comments in partial agreement	No. of Comments in dis­agreement
26.	Merchant banker shall     not lead manage any issue or be associated with any permitted activity, if its directors or key personnel or compliance officer or their relative(s) hold shares, above a prescribed threshold prescribed by the Board.	54	12	10	32

12.4. Summary of Public Comments

12.4.1. The threshold mentioned here should be increased to 2 percent of the issuer paid up capital as allowed even for an independent director in Companies Act and there should not be any value related thresholds. The proposed restriction be made applicable only to the deal team or transaction team and only in relation to IPOs.

12.4.2. For listed companies, there is no feasible method to track shareholding changes during the transaction lifecycle, which will be difficult to ensure compliance in terms of the proposal. Collecting timely and accurate information from numerous individuals especially from the relatives who are not financially dependent is extremely challenging. Thus, applying these restrictions for transactions other than IPOs is neither practical nor reasonable

12.4.3. The definition of relative to be same as definition of immediate relative in SEBI Insider Trading Regulations instead of definition in the Income Tax Act 1961. Also, the cap of individual or aggregate holding of should be 5 percent of the issuer’s paid up share capital.

12.4.4. As opposed to imposing a complete embargo on undertaking a transaction, a disclosure-based regime be considered. The directors or key personnel or compliance officer or their immediate relatives as per the SEBI PIT Regulations exceeding prescribed thresholds be mandated to disclose their shareholding and the merchant banker be entrusted to resolve such conflicts of interest on the basis of their internal code of conduct in line with the existing framework.

12.4.5. The proposed threshold is unnecessarily low and would make it difficult for merchant bankers to engage in certain transactions, especially when minor shareholdings have little to no bearing on independence or fairness.

12.4.6. The proposed restrictions shall be made applicable exclusively to merchant bankers advising on public issues, and shall not be extended to other fundraising activities like rights issues, qualified institutional placements, or issue management services such as open offers, buybacks, and delisting.

12.4.7. As far as scope of securities in the proposed restriction is concerned, in addition to exclusion of holdings of mutual funds and exchange traded funds, investments through pooled investments vehicles should also be excluded as the effective shareholding in the investee company will not be discernible in such structures.

12.4.8. The exercise of managing NCS issues is very different from equity issues. While managing NCS issues, MBs do not obtain any price sensitive information pertaining to equity. Thus, it should be clarified that MB managing NCS issues shall be excluded from the purview of the said proposal as the same does not lead to any potential conflict of interest or comprised due diligence.

12.4.9. It has been suggested that as per presently, if the MB holds more than 15% in the issuer (proposed to be reduced to 10% of the issuer, in the extant Board memorandum) the MB can undertake marketing of the issue. Hence, a similar approach may be followed.

12.5. Analysis of Comments

12.5.1. The proposed requirement has been incorporated keeping in mind the potential conflict of interest, when the MB undertakes an activity of an issuer having listed or proposed to be listed securities.

12.5.2. While having even a small amount of shareholding may lead to compromised level of due diligence, keeping in mind the practical difficulties, a nominal level of shareholding has been allowed. The nominal level of shareholding i.e. 0.1% or Rs. 10,00,000, whichever is lower, seems to be sufficient.

12.5.3. With the advent of technology, it may be possible to ascertain the shareholding of designated persons in a listed company. The MB needs to ensure that if it intends to take up an activity of the listed company, the designated persons should divest the shareholding before such activity is taken up.

12.5.4. However, based on the comments from public, the proposal would be made applicable to public issues only, where the MB is involved in due diligence. Further, for public issues, MB may be allowed to undertake marketing of the issue only, subject to appropriate disclosures

13. Enhancing minimum personnel, experience and eligibility criteria

13.1. Existing provisions

13.1.1. Regulation 6(b) of MB Regulations requires that merchant banker shall have, in his employment, minimum two persons who have the experience to conduct the business of MB.

13.1.2. In this regard SEBI, vide FAQs on Registered intermediaries provided that the applicant should have at least two persons, who have an experience of at least two years in the relevant field. Further, the following may be considered as relevant experience for Merchant Banking

a. Working with a registered Merchant Banker.

b. Advisors to an Issue as part of a CA firm

13.2. Recommendation of the PMAC

13.2.1. The PMAC has recommended that the minimum experience requirements for two persons employed (hereafter referred as ‘KMP’) needs to be increased to at least five years for Category 1 MBs. Considering the fact that Category 1 MBs shall deal with larger issue size, the PMAC recommended that minimum number of employees handling core merchant banking activities be increased to five. The existing requirement may be continued for Category 2 MBs.

13.3. Public Comments and Analysis

Proposal in the Consultation Paper		Total comments	No. of Comments in agreement	No. of Comments in partial agreement	No. of Comments in dis­agreement
27.	For category   1     merchant bankers, at least five years of relevant experience   for minimum two employees may be required.For  category  2  merchant bankers, existing requirement of  two years  may be continued.	42	28	6	8
28.	Category 1 merchant bankers shall  be required to have minimum  five  employees handling  core merchant banking activities. For    category  2 merchant bankers, existing requirement of minimum two employees may be continued.	39	25	4	10
29.	The proposed eligibility criteria of key personnel and experience shall be applicable from  a date specified by SEBI.	35	28	2	5

13.4. Public Comments

13.4.1. The public comments are broadly in agreement with the proposals mentioned in the consultation paper. However, few commenters have said that the existing requirement is sufficient and adequate as per the current market scenario. The required technical competency in the MB industry has not increased manifold and additional work experience of 3 years may not have any significant advantage.

13.5. Analysis of Comments

13.5.1. Considering the view of public and the fact that there are new proposals introduced in respect of enhanced net worth, requirement to maintain liquid net worth and minimum revenue criteria to ensure quality intermediation, the present requirement of number of KMPs and their minimum years of experience may be retained.

14. Qualification for Compliance Officer

14.1. Existing provisions:

14.1.1. Regulation 28A of MB Regulations requires that every MB shall appoint a Compliance Officer who shall be responsible for monitoring the compliance of the Act, rules and regulations, notifications, guidelines, instructions, etc., issued by the Board or the Central Government and for redressal of investors’ grievances.

14.2. Recommendation of the PMAC

14.2.1. The PMAC recommended that personnel having work experience of atleast 15 years may also be eligible for appointment as Compliance Officer. Further, the PMAC recommended that where there is a vacancy in office of Compliance Officer, such vacancy shall be filled within three months from the date of vacancy. The PMAC also recommended that existing appointed Compliance officers may be permitted to continue provided they obtain requisite NISM Certification.

14.3. Public Comments and analysis

14.3.1. The responses received on the proposals made in the Consultation Paper are summarized below:

Proposal in the Consultation Paper		Total comments	No. of Comments in agreement	No. of Comments in partial agreement	No. of Comments in dis­agreement
30.	Merchant Bankers to have compliance officer at all times.	40	36	3	1
31.	Compliance officer should have minimum qualification of Company Secretary or graduate degree in law from a  university/  institution recognized by government.	50	15	3	32
32.	Compliance Officer   must have a  minimum  work experience of at least two years post qualification  in activities  relating  to corporate  or secretarial compliance.	40	30	6	4
33.	The role of  compliance officer shall be separate and independent from the role of KMPs and Principal Officer.	42	33	2	7
34.	Merchant Banker to fill any vacancy  in    the   office    of compliance   officer   within three months.	42	16	8	18
35.	The existing Compliance Officer  may  continue provided they have professional  qualification with a minimum five years of post-qualification work experience and prescribed NISM Certification from a date specified by the Board.	40	22	8	10

14.4. Summary of Public Comments

14.4.1. This takes away the credibility of experienced professionals without Law or Company Secretary degree who have been managing compliance for long time. Restricting the eligibility to specific degree is not healthy to overall growth aspirations of professionals who wish to pursue career in Merchant Banking. We suggest SEBI may borrow the requirement of Compliance Officer (‘CO’) under SEBI Prohibition of Insider Trading Regulations 2015 rather than adopting different standards.

14.4.2. There are many compliance professionals already working for merchant banks who, presently, may not be designated as Cos, but part of compliance team. Most of these professionals are CAs or MBAs but with significant number of years of experience. As they are presently not designated as CO, such professionals will become ineligible in one stroke impacting their careers. Further, though there is a grandfathering clause for existing COs, such professionals will lose this benefit if they switch job from one MB to another if they are not CS or LLB.

14.4.3. Other professional qualifications too should be considered like CA or MBA who have enough experience in the industry. Would suggest to modify the clause stating CS LLB CA MBA or graduates with more than 10 years of experience.

14.4.4. SEBI may appropriately look to adopt requirement of compliance officer as already prescribed in SEBI PIT Regulations rather than adopting different standards.

14.4.5. The scope of qualification is increased to include other post-graduation courses and qualification of chartered accountants within the eligibility criteria so that this does not restrict opportunities of career to other equally passionate compliance professional within the fields.

14.4.6. Generally, organization hold multiple licenses within single entity and would appoint single compliance officer across such licenses. This would lead to restricting other professional career opportunities. This professional can pass the Merchant Banker examination for the purpose of being equally competent. Also, this is equally surprising that while on one hand relaxation in qualification criteria is being provided to research analyst basis whose report investors would take decisions the qualification is being narrowed down to only two set of professionals such as Company Secretary and Law graduates. Thus, request SEBI to consider enhancing the scope of qualification to include other professional recognized courses such as CA ICWA and MBA having relevant years of experience for them to also have equal opportunities of employment and growth within the field of compliance.

14.5. Analysis of Comments

14.5.1. Since CS and graduate in Law are professionals with requisite knowledge including various regulatory compliances, Acts, sectoral Regulations, it is justified to have such professions employed as Compliance Officer.

14.5.2. Existing compliance officer may continue provided they have minimum five years of experience and obtain requisite NISM Certifications.

15. Experience of Principal Officer

15.1. Existing provisions

15.1.1. Regulation 2(1)(d) of MB Regulations defines ‘principal officer’ as

(i) proprietor, in the case of a proprietary concern,

(ii) partner, in the case of a partnership firm,

(iii)director, in the case of a body corporate who is responsible for the activities of the merchant banker.

15.1.2. As per Rule 7 of Prevention of Money Laundering (Maintenance of Records) Rules, 2005, every reporting entity shall communicate the name of its Principal Officer. As per Rule 2(f) of said Rules, “Principal Officer” means an officer designated by a reporting entity, provided that such officer shall be an officer at the management level.” The said Rules are applicable to intermediaries including MBs.

15.2. Recommendation of the PMAC

15.2.1. Under the existing framework, proprietary concern and partnership firm are not eligible for MB Registration. In view of the same, the PMAC recommended that the definition of principal officer needs to redefined and roles and responsibility of the principal officer needs to be explicitly defined.

15.3. Public Comments and analysis

15.3.1. The responses received on the proposals made in the Consultation Paper are summarized below:

Proposal in the Consultation Paper		Total comments	No. of Comments in agreement	No. of Comments in partial agreement	No. of Comments in dis­agreement
36.	The merchant banker shall ensure the principal officer, having at least five years of experience in  financial market, has been appointed from a date specified by the Board.	38	30	5	3

15.4. Public Comments

15.4.1. The public comments are broadly in agreement with the proposals mentioned in the consultation paper.

16. Other changes in MB Regulations

16A. Power of the Board to issue clarifications

16.1. Existing provisions

16.1.1. Under the present regulatory framework, there is no provision in this regard.

16.2. Recommendation of the PMAC

16.2.1. PMAC recommended that specific provision for Board to issue clarification should be provided.

16B. Proposal on penal provisions on failure of payment of renewal fees.

3. Existing provisions

16.3.1. Regulation 12(2) of MB Regulations provides that the Board may suspend the MB certificate of registration where the MB fails to pay the renewal fees within the prescribed time.

16.4. Recommendation of the PMAC

16.4.1. The PMAC agreed that penal provisions in form of interest in case of delay in payment of fees may be introduced. Further, MBs may be restrained to undertake any business or clients where such fees becomes due and is unpaid.

16.5. Public Comments and Analysis

16.5.1. The responses received on the proposals made in the Consultation Paper are summarized below:

Proposal in the Consultation Paper		Total comments	No. of Comments in agreement	No. of Comments in partial agreement	No. of Comments in dis­agreement
37.	A penal interest at 15%p.a. for each month of delay or part thereof to be charged, in case of delay in payment of renewal fees by merchant bankers..	35	34	1	0
39.	Merchant Bankers shall not undertake any business or clients from the day such fees become due and is unpaid.	35	32	0	3

16.6. Public Comments

16.6.1. The public comments are broadly in agreement with the proposals mentioned in the consultation paper.

16C. Merchant bankers not to undertake merchant banking activity without obtaining requisite registration from SEBI.

16.7. Existing provisions

16.7.1. Under the present regulatory framework, there is no provision in this regard.

16.8. Recommendation of the PMAC

16.8.1. PMAC recommended the specific provision – no merchant banker shall engage in merchant banking activities without obtaining requisite registration from SEBI.

16.9. Public Comments and analysis

16.9.1. The responses received on the proposals made in the Consultation Paper are summarized below:

Proposal in the Consultation Paper		Total comments	No. of Comments in agreement	No. of Comments in partial agreement	No. of Comments in dis­agreement
39.	No person shall act as a merchant banker, directly or indirectly, unless it has obtained a certificate of   registration from the Board under these regulations.	35	35	0	0

16.10. Public Comments

16.10.1. The public comments are broadly in agreement with the proposals mentioned in the consultation paper.

16D. Proposal on obtaining relevant NISM Certification by key employees & Compliance Officer.

16.11. Existing provisions.

16.11.1. In terms of sub-regulation (1) of regulation 3 of the Securities and Exchange Board of India (Certification of Associated Persons in the Securities Markets) Regulations, 2007 (the Regulations), the Board may require, by notification, any category of associated persons as defined in the Regulations to obtain requisite certification(s).

16.11.2. Further, SEBI, vide notification dated March 11, 2013 and August 02, 2013 has mandated the following:

SEBI,  notification dated   March 11, 2013 (For Compliance Officer)	a.  The person associated as Compliance officer shall obtain   certification  from    the   National    Institute   of Securities Markets (hereinafter referred to as “NISM”) by  passing     the    NISM-Series-III A:  Securities Intermediaries  Compliance    (Non-Fund)  Certification Examination (‘SICCE’).b.  An intermediary who engages or employs such associated person shall ensure such person obtainsSICCE certificate within one year from the date of his employment.
SEBI, notification dated August 02,2013	c. MBs shall ensure that at least two person designated, as Key Management Personnel shall obtain certification from      the    National   Institute   of    Securities    Markets(hereinafter referred to as ‘NISM’ by passing the NISM-Series-IX: Merchant Banking Certification Examination (‘MBCE’).
(For KMPs)	l. Merchant Banker, who engages or employs any such associated  person   shall  ensure that such  person obtains certification by passing MBCE within one year from the date of his employment

16.12. Recommendations of PMAC

16.12.1. The PMAC recommended that respective NISM certification should be mandated prior to grant of certificate. Further, in case of existing MB registration, the relevant NISM certification may be obtained within 90 days of appointment.

16.13. Public Comments and Analysis

16.13.1. The responses received on the proposals made in the Consultation Paper are summarized below:

Proposal in the Consultation		Total	No. of	No. of	No. of
Paper		comments	Comments in agreement	Comments in partial agreement	Comments in dis- agreement
40.	Merchant bankers shall ensure     that        the        key employees and Compliance officer have prescribed NISM Certifications  at all times, within timelines prescribed by the Board.	37	32	2	3

16.14. Public Comments

16.14.1. The public comments are broadly in agreement with the proposals mentioned in the consultation paper

16E. Maintenance of books of account, records and other documents

16.15. Existing provisions

16.15.1. Regulation 16 mandates merchant bankers to preserve the books of account and other records and documents for a period of five years

16.16. Recommendation of the PMAC

16.16.1. The PMAC recommended that MBs may be mandated to maintain books of accounts, other records and documents for period not less than eight financial years (On lines with Section 128(5) of Companies Act, 2013)

16.17. Public Comments and analysis

16.17.1. The responses received on the proposals made in the Consultation Paper are summarized below:

Proposal in the Consultation Paper		Total comments	No. of Comments in agreement	No. of Comments in partial agreement	No. of Comments in dis­agreement
41.	Merchant bankers to maintain books of accounts for at least eight years.	36	29	2	5
42.	Merchant Bankers shall be advised to maintain all the data and information in India only.	39	21	4	14

16.18. Summary of Public Comments

16.18.1. It is suggested to align the data requirement with Companies Act 2013 which mandates to have backup of data pertaining to books of accounts in India.

16.18.2. The related obligations of regulated entities, including the merchant bankers, in relation to data localization form part of SEBI Circular dated August 20, 2024, titled ‘Cyber Security and Cyber Resilience Framework for SEBI Regulated Entities’. Data localization is a nuanced subject and having two separate pieces of legislations from SEBI, will result in unnecessary confusion in relation to the applicability and interpretation of such requirements, especially in case if there are any conflicting provisions. Accordingly, such requirements need not be separately addressed in the MB Regulations.

16.18.3. Foreign banks leverage on group global applications systems and infrastructure, which are hosted and managed centrally outside India. These systems are logically segregated on a Need to Know basis to ensure data confidentiality. This helps to have efficient technology and cyber security support arrangements, which are managed centrally. Hence, instead of mandating to keep the data only in India requesting to mandate to keep a copy of the data in India. Further, data about certain functions is required to be available outside with respect to conflict, clearance, client selection etc. in cross border transactions or transactions involving MNC clients. Data is also needed to be reviewed by regional or global management teams committees and other control functions outside India. Therefore, such data should be permitted to be stored outside India. Request aligning the data requirement with Companies Act 2013 which mandates to have back up of data pertaining to books of accounts in India and allows data to be stored and processed outside of India.

16.18.4. The rationale behind this proposal is “to prevent any potential data leak/ theft”. However, it is submitted that storing data solely within India would not offer improvement on data leakage prevention because for global organizations, the same set of controls would be applied globally. For global organizations, cybersecurity controls follow global standards and can be consistently applied across all global applications, systems and infrastructure.

16.19. Analysis of Comments

16.19.1. With regard to the above proposal, SEBI’s circular dated August 20, 2024 is already in force, which mandates the merchant bankers to keep regulatory data and IT and Cybersecurity data available and easily accessible in legible and usable form within the legal boundaries of India.

16F. Acquisition of shares prohibited

16.20. Existing provisions

16.20.1. Regulation 26 – Acquisition of shares prohibited states “No merchant banker or any of its directors, partner or manager or principal officer shall either on their respective accounts or through their associates or relatives, enter into any transaction in securities of bodies corporate on the basis of unpublished price sensitive information obtained by them during the course of any professional assignment either from the clients or otherwise.”

16.21. Recommendation of the PMAC

16.21.1. The committee recommended modifying the heading by way of making appropriate amendment in SEBI MB Regulations to capture all transactions in securities. Further, compliance officer of MB shall also be prohibited in entering any transaction in securities of body corporate.

16.22. Public Comments and analysis

16.22.1. The responses received on the proposals made in the Consultation Paper are summarized below:

Proposal in the Consultation Paper		Total comments	No. of Comments in agreement	No. of Comments in partial agreement	No. of Comments in dis­agreement
43.	Modification  of the heading of Regulation 26 to   ‘any   transaction     in securities’.	34	32	2	0
44.	Include compliance officer   of  merchant banker,   its     associates and relatives         in Regulation 26.	35	23	11	1

16.23. Public Comments

16.23.1. The public comments are broadly in agreement with the proposals mentioned in the consultation paper.

16G. Information to the Board

16.24. Existing provisions

16.24.1. Regulation 27 states “Every merchant banker shall submit to the Board complete particulars of any transaction for acquisition of securities of any body corporate whose issue is being managed by that merchant banker within fifteen days from the date of entering into such transaction.

Provided that complete particulars of any transaction for acquisition of securities made in pursuance of underwriting or market making obligations in accordance with Chapter XA of the Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2009 shall be submitted to the Board on quarterly basis.”

16.25. Recommendation of the PMAC

16.25.1. The Committee recommended that the information w.r.t particulars of acquisition of securities of any body corporate should be submitted as a part of periodic report/half yearly report. Further, particulars of any transaction for acquisition of securities made in pursuance of underwriting or market making also should be submitted as a part of half-yearly report. This will entail ease of compliance and avoid any redundancy.

16.26. Public Comments and analysis

16.26.1. The responses received on the proposals made in the Consultation Paper are summarized below:

Proposal in the		Total	No. of	No. of	No. of
Consultation Paper		comments	Comments in agreement	Comments in partial agreement	Comments in dis- agreement
45.	Information related to the acquisition of  securities shall  be submitted to SEBI  as  part   of half- yearly report.	35	34	0	1

16.27. Public Comments

16.27.1. The public comments are broadly in agreement with the proposals

mentioned in the consultation paper.

16H. Review of periodic report submitted by Merchant Bankers

16.28. Existing provisions

16.28.1. Regulation 28(2) requires every merchant banker to submit a periodic report in such manner as may be specified by Board from time to time.

16.28.2. SEBI, vide para 7 of Master Circular for merchant bankers dated September 26, 2023 (previously SEBI Circular No. CIR/MIRSD/6/2012 dated May 14, 2012), prescribes a revised format of the periodic report and the Merchant Bankers were advised to submit the Report within three months of the expiry of the half-year ending March / September

16.29. Recommendation of the PMAC

16.29.1. The committee recommended that periodic report for merchant banker may revised to incorporate the above proposals.

13l. Guidelines on Outsourcing of Activities by Intermediaries

16.30. Existing provisions

16.30.1. SEBI Circular dated December 15, 2011: Guidelines on Outsourcing of Activities by Intermediaries

16.31. Recommendation of the PMAC

16.31.1. The committee recommended that core activities provided by merchant banker should not be outsourced.

16.32. Public Comments and analysis

16.32.1. The responses received on the proposals made in the Consultation Paper are summarized below:

Proposal in the Consultation Paper		Total comments	No. of Comments in agreement	No. of Comments in partial agreement	No. of Comments in dis­agreement
46.	Merchant Bankers shall not be   permitted   to    outsource core activities such as due diligence of  Issuer,	48	17	28	3

16.33. Public Comments

16.33.1. The public comments are broadly in agreement with the proposals mentioned in the consultation paper.

16J. Deletion of earlier redundant categorization and insertion of new categorization

16.34. Existing provisions

16.34.1. Regulation 3(2) provides that the application for a merchant banker shall be made for any one of the following categories namely:—

(a) Category I, that is—

(i) to carry on any activity of the issue management, which will, inter alia, consist of preparation of prospectus and other information relating to the issue, determining financial structure, tie up of financiers and final allotment and refund of the subscriptions; and

(ii) to act as adviser, consultant, manager, underwriter, portfolio manager;

(b) Category II, that is to act as adviser, consultant, co-manager, underwriter, portfolio manager;

(c) Category III, that is to act as underwriter, adviser, consultant to an issue;

(d) Category IV, that is to act only as adviser or consultant to an issue.

16.34.2. Regulation 3(2A)(i) states that notwithstanding anything above, the application shall be made only for category I merchant banker and has done away with category II, III and IV

16.34.3. An applicant can carry on the activity as portfolio manager only if he obtains separate certificate of registration under the provisions of the Securities and Exchange Board of India (Portfolio Manager) Regulations, 1993.

16.35. Recommendation of the PMAC

16.35.1. The grant of MB registration under various category was done away in 1997. Accordingly, the PMAC recommended that references to Category I, II, III and IV may be deleted and suitable reference to Category 1 and Category 2 be made.

16.36. Public Comments and analysis

16.36.1. The responses received on the proposals made in the Consultation Paper are summarized below:

Proposal in the Consultation Paper		Total comments	No. of Comments in agreement	No. of Comments in partial agreement	No. of Comments in dis­agreement
47.	References given  to merchant banker registration granted under category I, II, III and IV may be deleted and proposed categorization i.e., Category 1 and Category 2 may suitably be incorporated.	37	34	3	0

16.37. Public Comments

16.37.1. The public comments are broadly in agreement with the proposals mentioned in the consultation paper.

Annexure-III

(Amendments shall be notified after following the due process)

******

Source: SEBI Board Meeting Dated: Wednesday 18th December 2024