[Manit Sharma and Priyal Singh are 4th year students at Gujarat National Law University, Gandhinagar and SVKM’s NMIMS School of Law, Navi Mumbai respectively]
The Securities and Exchange Board of India (SEBI) late last year reviewed and approved amendments to the SEBI (Merchant Bankers) Regulations, 1992 (Regulations). These regulations have acted as the cornerstone for the elibility of merchant bankers (MBs), and their registration and operations in India, with a view to ensuring that they adhere to an established framework. However, it became clear that these restrictions needed to be reviewed and updated as the market evolved and India’s financial landscape became more globalized.
The recently approved amendments, stemming from the consultation paper (Consultation paper) published by SEBI in August 2024, seek to streamline the operations of MBs and enhance their compliance with SEBI’s regulatory oversight. The objective is to promote accountability and transparency in the financial sector while ensuring that MBs can function effectively within a structured framework. Although the amendments are a positive start, they raise several concerns that could make it more difficult for MBs to operate. This post outlines the key changes introduced by the amendments and propose solutions to address some of the challenges posed by the reforms. While the amendments provides for many changes to the existing framework, the scope of this post is confined to the restrictions imposed by the SEBI in relation to the permitted activities that the MBs can undertake.
The Amendments
Earlier, the activities explicitly listed by SEBI that MBs could undertake were regulated by Para 2 of Master Circular on Merchant Bankers. The recent amendments propose that MBs, other than banks, public financial institutions (PFIs) and their subsidiaries, shall undertake the following permitted activities that were clarified in the consultation paper:
- Managing of public issues, qualified institutions placements and rights issues of securities; and advisory or consulting services incidental to such public issues, placements and rights issues.
- Managing of acquisitions and takeovers, buyback, delisting, scheme of arrangement, implementation of scheme, underwriting of securities and any other activity as permitted under respective SEBI Regulations, and advisory or consulting services incidental to the permitted activities.
- Private placement of securities that are listed or proposed to be listed on a stock exchange recognized by SEBI.
- Managing of international offering of securities and incidental advisory or consulting services to such offering.
The recent amendments primarily focus on restricting the scope of activities that MBs can undertake. According to the new regulations, MBs excluding banks, PFIs, and their subsidiaries will now be required to limit their activities to those explicitly listed by SEBI. This marks a significant change from the previous framework, which provided MBs with broader flexibility regarding the range of services they could offer.
The objective behind this shift is to ensure that MBs engage only in regulated activities, ensuring greater accountability and reducing the risk of non-compliant practices. Additionally, the amendments stipulate that MBs involved in non-permitted activities must segregate these functions into separate legal entities within two years. The new entities must operate under distinct brand names and follow a code of conduct set by SEBI.
While the amendments aim to streamline the operations of MBs and ensure compliance with regulatory standards, several practical challenges need to be addressed.
Challenges Posed by the Amendments
The most significant change in the amendments is the restriction on the activities that MBs can engage in. Under the new framework, MBs are only allowed to undertake activities explicitly mentioned by SEBI. While this may help maintain regulatory clarity, it could also limit the range of services that MBs have traditionally provided. For instance, private placement of unlisted securities, which is a critical funding mechanism for many companies, has been excluded from the list of permitted activities. This move could significantly disrupt well-established practices, particularly for businesses that prefer private placements over the public listing route. Private placements offer companies a more flexible and cost-effective way to raise capital, especially for those not ready to go public. By restricting MBs from engaging in these activities, SEBI risks limiting the options available to companies seeking funding.
Similarly, corporate advisory services, including mergers, acquisitions, capital advisory, and restructuring, have also been excluded from the list of permitted activities. These services are fundamental for the growth of businesses, especially in the early stages when companies need expert guidance to navigate complex financial and strategic decisions. Limiting MBs’ ability to offer these services could create a significant gap in the market, potentially hindering the growth of emerging businesses.
Another significant challenge posed by the amendment is the requirement for MBs to segregate non-permitted activities into separate legal entities. While the intent behind this is to ensure that MBs operate strictly within the regulatory framework, this segregation could lead to significant operational complexities. Creating separate legal entities for non-permitted activities involves substantial costs and could lead to inefficiencies, particularly for businesses that are already operating with limited resources. Moreover, requiring MBs to establish new entities could result in legal and compliance hurdles. Companies may face delays in setting up the new entities and obtaining the necessary approvals, which could disrupt ongoing operations and affect business performance. Furthermore, managing multiple entities under one corporate structure could increase administrative overheads and complicate the governance structure.
The amendments also raise concerns for MBs that are subsidiaries or affiliates of foreign banks or financial institutions. These entities may face stricter regulations compared to their domestic counterparts, especially when it comes to the segregation of business activities, as domestic banks and financial institutions are not covered under the ambit of the recent amendment. Given that many foreign affiliated MBs operate within global financial groups, this new requirement could create operational challenges and delay business decisions.
For foreign subsidiaries, the process of obtaining government approval for the segregation of activities could be time-consuming, leading to significant delays in executing business strategies. Moreover, these foreign-affiliated MBs may be at a competitive disadvantage compared to domestic MBs, particularly when it comes to the flexibility of their operations. It is essential to ensure that foreign affiliated MBs are not unfairly burdened with more stringent regulations, as this could discourage foreign investment in India’s financial sector. While the amended regulations bring about much-needed clarity and structure, it is essential to address the concerns to ensure that the regulations do not inadvertently stifle growth or limit the services available to clients.
Proposed Solutions and Recommendations
One of the primary concerns with the amendments is the exclusion of certain critical activities, such as private placement of unlisted securities and corporate advisory services, from the list of permitted activities. It is believed to be beneficial for SEBI to retain these activities in the permitted list. The private placement of unlisted securities, for instance, is an important funding avenue for businesses, particularly those that are not ready for public listing. Restricting MBs from engaging in such activities could have an adverse impact on the capital raising process for many companies. Similarly, corporate advisory services are vital for business growth, and limiting MBs’ ability to offer these services could hinder the strategic development of both listed and unlisted entities.
To ensure that foreign affiliated MBs are not disadvantaged, it is proposed that SEBI adopts a more flexible approach for these entities. If a MB is part of a regulated global financial group, the same exemptions that apply to domestic banks and PFIs should also extend to foreign affiliated MBs. This would level the playing field and ensure that foreign entities are not subject to stricter regulations that could hinder their operations.
Many MBs hold multiple licences, including for stock broking, research analysis, and other financial services. The regulations should clarify that MBs holding multiple SEBI licences can continue to operate under the same legal entity, provided they comply with the relevant rules for each activity. This will help reduce operational confusion and ensure that MBs can continue to offer a wide range of services without the need to segregate operations unnecessarily.
Conclusion
The amendments to the SEBI (Merchant Bankers) Regulations, 1992, mark a significant shift in the regulatory framework governing MBs in India. While the intention behind these changes is to enhance transparency, accountability, and regulatory compliance, the restrictions imposed on MBs’ activities present operational and strategic challenges. Limiting key services such as private placements and corporate advisory could hinder business growth and disrupt capital-raising mechanisms.
To strike a balance between regulatory oversight and operational efficiency, it is crucial for SEBI to reconsider certain exclusions and allow greater flexibility, particularly for foreign-affiliated MBs and those holding multiple financial licences. By addressing these concerns, SEBI can foster a more inclusive and dynamic financial ecosystem, one that supports innovation, facilitates capital formation, and strengthens India’s position as a global financial hub.
– Manit Sharma & Priyal Singh
