SEBI mulls tightening Merchant Bankers Rules; enhances Net Worth requirements

Capital markets regulator Sebi on Wednesday proposed stricter norms for merchant bankers enhancing qualification requirements and raising net worth threshold by 10 times to Rs 50 crore.

Additionally, the regulator suggested that merchant bankers should not undertake valuation except as specified by the board (Sebi) from time to time.

Currently, there is no specific prescription given under merchant bankers regulations with respect to merchant bankers undertaking valuation activities.

"Merchant bankers play an imperative role in the primary market and have been entrusted with the responsibility to ensure appropriate due-diligence, maintain integrity of primary market and ensure compliance with relevant laws on 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 merchant bankers in the primary market has increased significantly," the regulator said in its consultation paper.

Currently, there are more than 200 registered merchant bankers in India, which help companies launch an initial public offering (IPO).

Sebi has proposed that merchant bankers should be categorised into two based on net worth and activities to be undertaken -- Category 1 and Category 2.

The Category 1 merchant bankers should be required to have a net worth of at least Rs 50 crore at all times and should be allowed to undertake all activities that fall under Sebi's ambit.

Category 2 merchant bankers should be required to have a net worth of at least Rs 10 crore and should not be allowed to undertake main board issues.

At present, minimum net worth requirement for merchant bankers is Rs 5 crore. This threshold was revised in 1995 from Rs 1 crore in 1992.

Additionally, it has been proposed that merchant bankers should maintain a liquid net worth of at least 25 per cent of the minimum net worth requirement at all times. It could turn out to be Rs 12.5 and Rs 2.5 crore for Category 1 and Category 2 merchant bankers.

To strengthen the eligibility criteria, Sebi has suggested enhancing the minimum personnel, experience, and eligibility requirements.

For the proposed Category 1 merchant bankers, Sebi said they must have at least five years of relevant experience for minimum two employees. For Category 2 merchant bankers, the existing requirement of two years should be continued.

The proposed Category 1 merchant bankers should be mandated to have a minimum of five employees handling core merchant banking activities. For Category 2 merchant bankers, the existing requirement of a minimum of two employees should be continued.

Also, it has been suggested that the compliance officer should have a minimum qualification of a company secretary or graduate degree in law.

The officer must have a minimum work experience of at least two years post-qualification in activities relating to corporate or secretarial compliance.

The regulator has suggested restraining merchant banks from handling their own issue to avoid conflict of interest and ensure independent due diligence.

Also, the merchant banker should not be permitted to "lead manage" any issue if its key personnel, individually or in aggregate owns, more than 0.1 per cent of the issuer's paid-up share capital.

The registration granted to a merchant banker should be cancelled if Category 1 fails to earn a revenue of at least Rs 25 crore in three immediately preceding financial years, on a combined basis, from permitted activities, while the same for Category 2, merchant bankers should be least Rs 5 crore.

To ensure high standards of service, merchant bankers should not be permitted to outsource core activities such as due diligence of issuer and preparation of offer document.

The threshold for underwriting obligations should be prescribed at seven times of net worth or 20 times of liquid net worth, whichever is lower.

Further, in order to encourage merchant bankers to maintain higher proportion as liquid net worth, merchant bankers maintaining more than 35 per cent of net worth as liquid net worth should be given benefit of maintaining higher liquid net worth.

Merchant bankers undertaking activities other than the permitted activities of engaging in the business of issue management and its related activity in the securities market should segregate such activities, the paper said.

The regulator has observed that merchant bankers are engaged in private placement activities pertaining to unlisted companies, advisory services for projects and syndication of rupee term loans, etc, which are outside the Sebi domain.

It may be pertinent to note that undertaking such activities may pose significant regulatory and systemic risks as such activities are outside the jurisdiction of Sebi.

The Securities and Exchange Board of India (Sebi) has sought comments from the public till September 18 on the proposals.