On August 28, 2024, SEBI released a Consultation Paper on ‘Review of Securities and Exchange Board of India (Merchant Bankers) Regulations, 1992' (“CP”), setting forth for public comments a set of proposed amendments to the Securities and Exchange Board of India (Merchant Bankers) Regulations, 1992 (“MB Regulations”). These are intended to clarify and update the MB Regulations in line with the contemporary role played by merchant bankers in the Indian securities market as well as with other SEBI regulations.
Our View:
The CP is a step towards SEBI’s commitment to keep its regulations updated with the prevailing conditions in the market as well as with each other. However, certain proposals require revision.
(a) In our view, SEBI’s requirement that no activities other than merchant banking activities be carried out through the merchant banking entity is not backed by the rationale that a lesser measure would not suffice. Internal segregations, Chinese walls and/or undertaking such activities through a separately identifiable department should have been considered before imposing an outright prohibition. Moreover, especially when other regulators have taken a view that merchant bankers may be appropriately suited to carrying on a certain activity, such as dealership of government securities, it is questionable for SEBI to prohibit merchant bankers from carrying on such activities.
(b) Similarly, when the Central Government or the RBI has taken a view that merchant bankers are suited to performing valuation activities for the purposes of taxation or foreign exchange laws, it may be viewed as inappropriate for SEBI, being at most a co-equal authority, to prohibit them from performing such activities. Indeed, the effect of SEBI’s proposals in regard to valuation activities would be to confine them to valuation in respect of acquisitions and share-based employee benefits and sweat equity.
(c) We note that the exclusion of body corporates incorporated outside India, except foreign banks licensed by RBI to undertake financial business in India, from being merchant bankers may lead to detrimental effects for Indian issuers offering securities outside India as such offers may be best managed by merchant bankers operating in their respective jurisdictions. A carve-out may therefore be made in respect of merchant bankers engaged solely in acting in respect of transactions of securities by Indian issuers with persons based outside India.
(d) Finally, we note that the requirement for earning a minimum revenue of Rs. 25 crores or Rs. 5 crores, in the case of a Category 1 or Category 2 merchant banker respectively, in three immediately preceding financial years from permitted activities, is onerous and may unduly affect merchant bankers who, in good faith, are unable to earn the required revenue due to inability to procure sufficient business, which may even be due to market conditions which are outside the merchant banker’s control. Further, such a requirement may create perverse incentives for merchant bankers to procure business by inappropriate means.
The attempt of the SEBI in the CP, to keep the MB Regulations updated in line with market conditions and the prevailing regulatory framework, is indeed commendable. However, it is important to maintain a balance and ensure that merchant bankers are not burdened with overly onerous requirements or restrictions that do not serve the interests of India’s financial sector.
You can mail us your queries or comments at Rishabh Jain.
