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SEBI(Photo: Shutterstock)
The Securities and Exchange Board of India (Sebi) has proposed an overhaul of investment banking regulations amid a boom in the equity capital market (ECM).
In a consultation paper floated on Wednesday, the regulator has proposed a 10 time-hike in the net worth and provided more clarity on the roles and responsibilities of investment bankers — known as merchant bankers in regulatory parlance.
At present, there are over 200 registered merchant bankers in the country, which help companies launch an initial public offering (IPO) or a listed entity raise additional funds via qualified institutional placements or offer for sale.
The current net worth requirement for merchant bankers is Rs 5 crore, which was last hiked in 1992 from Rs 1 crore.
The regulator has now proposed to have two categories of investment banks based on their net worth.
Those with at least Rs 50 crore net worth will fall under Category 1 and will be allowed to undertake all activities that fall under Sebi’s ambit.
Meanwhile, those with net worth of at least Rs 10 crore will fall under the Category 2 not be allowed to handle main board issues.
Further, the regulator has proposed that merchant banks maintain a fourth of their net worth in “liquid” assets — those that can be easily converted into cash.
The amount of issues that an investment banker can underwrite will be linked to net worth.
“The underwriting threshold to be prescribed at seven times of net worth or 20 times of liquid net worth, whichever is lower,” Sebi said.
The regulator proposed a glide path of two years to meet these requirements after they are approved by its board.
“Merchant banker’s play an imperative role in the primary market and have been entrusted with the responsibility to ensure appropriate due diligence, maintain integrity of the primary market and ensure compliance with the relevant laws on their own account and on behalf of the issuers. As a result of evolution of the securities markets and overall increased compliance requirements, the roles and responsibilities and business undertaken by them in the primary market have increased significantly,” the regulator said in the consultation paper.
To provide more clarity on their roles, Sebi has said merchant bankers will be allowed to undertake only those activities, which are related to the securities market and come under its jurisdiction. Currently, there is no specific provision around this.
To ensure only serious players get registered as merchant bankers, Sebi has prescribed a revenue threshold of at least Rs 25 crore in the three immediately preceding financial years, on a combined basis, from permitted activities.
Sebi has also prescribed that a single corporate group, other than banks and public financial institutions, can have only one merchant banking license.
The regulator has observed that the practice of having multiple merchant banking registrations is prone to misuse.
“If a merchant banker is debarred from undertaking certain merchant banking activities through a regulatory order, may shift such activities to its other related/connected merchant banker,” the Sebi has said.
The regulator has proposed to bar merchant banks to handle their own issue to avoid conflict of interest and ensure independent due diligence. Also, the merchant banker will not be allowed to “lead manage” any issue if its key personnel, individually or in aggregate holds, more than 0.1 per cent of the issuer’s paid up share capital.
The regulator has also prescribed that Category 1 bankers have at least five years of relevant experience for minimum two employees. Meanwhile, for those under Category 2, the existing requirement of two years will continue.
Sebi has proposed to exclude foreign corporates from being eligible for grant of registration as merchant bankers, except foreign banks licensed with the Reserve Bank of India.
First Published: Aug 28 2024 | 7:58 PM IST
