SEBI Raises Merchant Bankers' Net Worth Requirements to Rs 50 Crore

SEBI’s Net Worth Overhaul for Merchant Bankers: A New Era of Capital Strength and Role Clarity

In a significant recalibration of India's merchant banking framework, the Securities and Exchange Board of India (SEBI) has announced sweeping changes aimed at strengthening the financial integrity, business focus, and operational transparency of merchant bankers. The revised norms, effective December 18, 2024, mark the most ambitious upgrade to the merchant banking regulations since the mid-1990s.

For market participants, these reforms signal a decisive shift toward higher standards and stricter role delineation. Here's what industry professionals must take note of.

1. Steep Increase in Net Worth Thresholds

In a move that raises the entry and continuity bar, SEBI has increased the minimum net worth requirement for Category I merchant bankers from ₹5 crore to ₹50 crore. This tenfold increase—coming nearly three decades after the last revision—reflects the regulator’s intent to ensure that only well-capitalised, serious entities remain in the business of managing IPOs, advising on mergers, and underwriting issues.

Such a substantial hike is expected to significantly filter the field, bringing in capital adequacy as a key compliance cornerstone.

2. Activity Segregation and Business Purity Requirements

To avoid conflicts of interest and reinforce the core function of merchant banking, SEBI has mandated a clear separation between permitted merchant banking activities and other auxiliary or unrelated services.

Key Mandates:

• Merchant bankers may now only undertake activities expressly permitted by SEBI, such as issue management, corporate advisory, and underwriting.
• Any non-core business, such as wealth management, fintech operations, or non-advisory financial services, must be hived off into a separate legal entity.

While these spin-offs may share infrastructure or personnel on an arm’s-length basis, the core merchant banker must maintain distinct legal and brand identity. Importantly, it shall bear no financial or legal liability for the actions of the separate entity.

3. Introduction of Tiered Licensing Structure

To reflect the varied scales and scopes of merchant banking operations, SEBI has introduced a two-tier licensing system:

Category	Minimum Net Worth	Permitted Activities	Key Notes
Category I	₹50 crore	All SEBI-sanctioned merchant banking services, including mainboard IPOs	Must show ₹25 crore revenue over 3 years
Category II	₹10 crore	All merchant banking functions excluding mainboard IPOs	₹5 crore revenue minimum over 3 years

This differentiation is designed to accommodate mid-sized players while ensuring that only financially robust firms handle large-scale capital market transactions.

4. Prohibition on Valuation Services Under Merchant Banking Licence

In a bid to enhance the objectivity and independence of valuations, SEBI has imposed a strict prohibition on new valuation mandates under the merchant banking licence.

While firms may complete any assignments already underway, they must obtain dedicated registration from the relevant valuation authorities (such as IBBI or ICAI) within nine months to continue such services.

This move aims to prevent conflicts of interest, particularly in transactions involving issue pricing or restructuring advice.

5. Liquidity and Revenue Discipline Norms

SEBI has laid down additional financial discipline measures to ensure long-term viability and regulatory seriousness:

• At least 25% of the minimum net worth must be held in liquid assets, providing buffer room for obligations and operational shocks.

• Merchant bankers must also demonstrate minimum cumulative revenue over a three-year period:

  • Category I: ₹25 crore
  • Category II: ₹5 crore

Failure to meet these thresholds may lead to cancellation of the licence.

6. Transition Window and Compliance Oversight

To facilitate a smooth transition, SEBI has granted existing merchant bankers up to two years to comply with the revised net worth and entity segregation norms.

However, during this period:

• All shared services between the merchant banker and its separate entity must comply with arm’s length and disclosure standards.
• Annual compliance audits and detailed reporting protocols will apply, ensuring full regulatory visibility and accountability.

SEBI’s Strategic Intent: Filtering, Focus, and Financial Strength

With this regulatory overhaul, SEBI is making it abundantly clear: only firms with financial heft, operational clarity, and singular regulatory focus will be permitted to operate as merchant bankers.

These norms are expected to:

• Remove undercapitalised or loosely structured entities from the ecosystem
• Ensure greater investor confidence through clear separation of advisory and valuation roles
• Promote a more professional and sustainable capital market advisory framework

Conclusion: Raising the Bar for Merchant Banking in India

SEBI’s changes are not cosmetic—they represent a structural evolution of India’s merchant banking regime. The transition will test the adaptability of many existing players, but for those who meet the new bar, it opens a path toward greater trust, scale, and credibility in capital markets.

With India’s IPO pipeline growing deeper and more sophisticated, the regulator’s message is clear: merchant banking is no longer a side business—it is a core financial service that demands both financial muscle and clear accountability.