Sebi Proposes Major Overhaul of Investment Banking Norms Amid ECM Surge

The Securities and Exchange Board of India (Sebi) has unveiled a significant overhaul of investment banking regulations, reflecting the boom in the equity capital market (ECM). In a recently issued consultation paper, Sebi has proposed substantial changes to the existing norms governing investment banks, also known as merchant bankers, aiming to enhance market integrity and align with the growing complexities of the sector.

New Regulatory Proposals:

One of the most notable changes is the proposed increase in the net worth requirement for merchant bankers. Currently, the net worth requirement stands at Rs 5 crore, a figure unchanged since 1992 when it was raised from Rs 1 crore. Under the new proposal, the net worth requirement will see a tenfold increase, with two distinct categories established based on net worth thresholds:

Category 1: Firms with a net worth of at least Rs 50 crore will be classified as Category 1 and will be permitted to undertake all activities within Sebi’s regulatory framework.
Category 2: Those with a net worth of Rs 10 crore will fall into Category 2 and will be restricted from handling main board issues.

Further, Sebi has suggested that merchant bankers maintain at least 25% of their net worth in “liquid” assets, which are easily convertible into cash. This measure aims to enhance financial stability and ensure that firms can meet their obligations.

Underwriting and Experience Requirements:

The regulator has proposed a new underwriting threshold linked to net worth. Specifically, the underwriting limit would be set at seven times the net worth or 20 times the liquid net worth, whichever is lower. Additionally, Sebi plans to introduce a two-year glide path for firms to comply with these new requirements once they are finalized.

To bolster the quality of market participants, Sebi has recommended that merchant bankers have a minimum revenue threshold of Rs 25 crore from permitted activities over the past three years. This change is designed to ensure that only serious and capable players enter the field. Moreover, a single corporate group, excluding banks and public financial institutions, will be allowed only one merchant banking license to prevent conflicts of interest and regulatory arbitrage.

Role Clarity and Conflict of Interest:

Sebi’s proposal also includes clarifying the roles and responsibilities of merchant bankers. The new regulations will restrict merchant bankers to activities directly related to the securities market and within Sebi’s jurisdiction. Additionally, firms will be barred from handling their own issues to mitigate conflicts of interest. Key personnel will also be restricted from holding more than 0.1% of the issuer’s paid-up share capital to ensure independent and unbiased management of issues.

Experience and Registration Restrictions:

For Category 1 merchant bankers, Sebi proposes a requirement of at least five years of relevant experience for a minimum of two employees. Category 2 firms will maintain the existing requirement of two years. Furthermore, Sebi plans to exclude foreign corporates from registering as merchant bankers, except for foreign banks licensed by the Reserve Bank of India.

Market Implications:

These proposed changes come at a time when the Indian ECM market is experiencing unprecedented activity. The updated regulations aim to ensure that market participants adhere to higher standards of transparency and diligence, thus safeguarding the interests of investors and maintaining the integrity of the financial markets.

Sebi’s consultation paper marks a significant step towards modernizing and strengthening investment banking regulations. The regulator has invited feedback from stakeholders, which will be considered before finalizing the new rules.

In conclusion, Sebi’s proposed overhaul seeks to create a more robust and transparent investment banking environment, addressing both the challenges and opportunities presented by the booming ECM sector.