Description

SEBI amends Merchant Bankers Regulations introducing new definitions for Principal Officer, two-tier category system (Category-I and Category-II), and updated registration requirements for merchant banking activities.

Summary

SEBI has notified the Securities and Exchange Board of India (Merchant Bankers) (Amendment) Regulations, 2025, effective three days from gazette publication date (December 3, 2025). The amendments introduce significant changes to the SEBI (Merchant Bankers) Regulations, 1992, including mandatory appointment of Principal Officer with specific qualifications, introduction of two-tier merchant banker category system, and updated registration requirements.

Key Points

  • New definition of “Principal Officer” introduced - must have minimum 5 years experience in financial markets and responsibility for merchant banking operations
  • Existing merchant bankers must comply with Principal Officer requirements within timeline specified by SEBI
  • Two categories of merchant banker registration established: Category-I (all permitted activities) and Category-II (restricted from main board IPO-related activities)
  • Category-II merchant bankers cannot handle public issues of equity shares proposed for listing on main board of recognized stock exchanges
  • Existing registered merchant bankers can re-categorize between Category-I and Category-II within SEBI-specified timeline
  • Registration applications must be made in Form-A with non-refundable application fees as per Schedule-II
  • Applicants must be body corporates including companies under Companies Act 2013 or Limited Liability Partnerships, excluding one-person companies and foreign companies (except licensed foreign banks)
  • Regulations effective from third day of gazette publication

Regulatory Changes

Amendment to Regulation 2(1)(d) - Principal Officer Definition:

  • Principal Officer must be an employee with minimum 5 years experience in financial markets
  • Must be designated by merchant banker with responsibility for management and conduct of merchant banking operations
  • Responsible for decisions taken at merchant banker level regarding all other operations
  • Existing merchant bankers must ensure compliance within SEBI-specified timeline and manner

Amendment to Regulation 3 - Registration Certificate Requirements:

  • No person can act as or represent themselves as merchant banker without SEBI registration certificate
  • Applications for registration must be submitted to SEBI in Form-A
  • Non-refundable application fees as per Schedule-II must be paid
  • Two-tier category system introduced:
    • Category-I: Permitted to undertake all activities including main board IPOs
    • Category-II: Permitted activities except public issues of equity shares for main board listing
  • Existing merchant bankers can change category within SEBI-specified timeline

Amendment to Regulation 6 - Eligibility Criteria:

  • Applicant must be body corporate including:
    • Companies under Companies Act 2013 or earlier company laws
    • Limited Liability Partnership firms
  • Exclusions:
    • Companies incorporated outside India (except foreign banks licensed by RBI)
    • One-person companies as defined under Companies Act 2013

Compliance Requirements

For Existing Merchant Bankers:

  1. Appoint Principal Officer meeting specified qualifications within SEBI-notified timeline
  2. Re-categorize as Category-I or Category-II within SEBI-specified timeframe
  3. Ensure Principal Officer has minimum 5 years financial markets experience
  4. Update internal systems to comply with amended regulations

For New Applicants:

  1. Apply for registration in Form-A specifying category preference (Category-I or Category-II)
  2. Pay non-refundable application fees per Schedule-II
  3. Ensure applicant entity meets eligibility criteria (body corporate, excluding foreign companies and one-person companies)
  4. Appoint Principal Officer with required qualifications before commencing operations
  5. Cannot act as merchant banker without valid registration certificate

Category-Specific Restrictions:

  • Category-II merchant bankers prohibited from undertaking public issue activities for equity shares intended for main board listing on recognized stock exchanges

Important Dates

  • Notification Date: December 3, 2025 (Gazette publication)
  • Effective Date: December 6, 2025 (third day from gazette publication)
  • Compliance Timeline for Existing Merchant Bankers: To be specified by SEBI separately for:
    • Principal Officer appointment
    • Category re-classification

Impact Assessment

Market Impact:

  • Two-tier system creates differentiated merchant banking landscape with specialized service providers
  • Category-II merchants may focus on non-IPO activities like private placements, debt issues, and advisory services
  • Enhanced professionalization through mandatory Principal Officer requirement with experience criteria

Operational Impact:

  • Existing merchant bankers face compliance burden for appointing qualified Principal Officer
  • Need for internal restructuring to accommodate Principal Officer role with decision-making authority
  • Category-II entities may need to partner with Category-I for main board IPO mandates or upgrade category
  • Foreign merchant bankers (except licensed foreign banks) cannot register, potentially affecting cross-border transactions

Compliance Impact:

  • Immediate action required by existing merchant bankers to identify and appoint Principal Officer
  • Decision needed on category selection based on business model and service offerings
  • Enhanced accountability through Principal Officer mechanism for all merchant banking operations
  • LLP structure now explicitly permitted, expanding eligible entity types

Risk Mitigation:

  • Principal Officer requirement strengthens governance and oversight at merchant banker level
  • Experience mandate (5 years in financial markets) ensures qualified leadership
  • Category restrictions prevent under-qualified entities from handling complex main board IPOs

Impact Justification

Major regulatory amendment affecting all merchant bankers with mandatory compliance requirements for Principal Officer appointment and category re-classification within specified timelines