SEBI Strengthens Merchant Banker Requirements: A Critical Appraisal of the 2026 Circular on Capital Adequacy, Liquid Net Worth and Compliance

Introduction

Merchant bankers occupy a central role in India’s capital markets, acting as lead managers to public issues, advising on corporate restructuring, and facilitating capital raising. Given this pivotal position, they are regulated by the Securities and Exchange Board of India (SEBI) under the SEBI (Merchant Bankers) Regulations, 1992 (MB Regulations).

Over time, these regulations have evolved to address increasing market complexity, conflicts of interest, and systemic risks. On 2 January 2026, SEBI issued a circular titled “Specification of consequential requirements pursuant to amendments to the SEBI (Merchant Bankers) Regulations, 1992”, following amendments notified on 5 December 2025 (effective 3 January 2026).¹

The revised framework enhances capital adequacy norms, introduces liquid net worth requirements, rationalises categorisation, imposes underwriting and compliance obligations, and strengthens governance standards. This article critically examines the circular, its statutory basis, and its implications.

Regulatory Framework

The MB Regulations, 1992 establish the framework for registration and functioning of merchant bankers. Prior to the 2025 amendments:

• Category I merchant bankers were required to maintain a minimum net worth of ₹5 crore
• Category II merchant bankers had lower thresholds (historically ₹50 lakh, though Category II registrations had largely been phased out in practice)

The 2025 amendments (effective January 2026) introduce a restructured two-category regime, aligned more closely with functional roles:

• Category I: Full-service merchant bankers, including lead management
• Category II: Limited-role intermediaries (e.g., co-managers, underwriters)

The 2026 circular operationalises these amendments by prescribing compliance timelines, computation methodologies, and governance requirements.

Capital Adequacy and Liquid Net Worth

A key reform is the introduction of “liquid net worth” under newly inserted provisions (commonly reflected through Regulation 7 read with enabling provisions such as 7A).

Key Clarifications from the Circular

• New applicants (post 3 January 2026) must satisfy both, Minimum net worth, and Liquid net worth requirements at the time of application
• Existing merchant bankers are granted a phased compliance window

Computation of Liquid Net Worth

Liquid net worth is defined as net worth held in unencumbered liquid assets, subject to prescribed haircuts:

• 0% haircut: Cash, bank balances, fixed deposits
• 10% haircut: Government securities, units of liquid mutual funds
• 30% haircut: Listed equity securities (e.g., constituents of broad indices such as Nifty 500)

Only values recorded in the books as of the computation date are considered.

Merchant bankers must:

• Maintain liquid net worth on an ongoing basis, and
• Obtain half-yearly certification from a chartered accountant

Non-SEBI Regulated Activities and Arm’s Length Requirements

Under provisions such as Regulation 13A(2), merchant bankers may undertake non-SEBI regulated activities, subject to strict safeguards.

Circular Requirements

• Activities must be conducted through Separate Business Units (SBUs)
• Maintenance of Chinese walls (information barriers)
• Separate personnel, records, and grievance redressal mechanisms
• Mandatory disclosure on websites, including clarification that SEBI investor protection norms do not apply
• Client acknowledgements required

Existing arrangements must be aligned within six months (by 3 July 2026).

Merchant bankers are also required to submit half-yearly compliance reports.

The Circular in Context

1. Responding to Market Evolution

India’s capital markets have expanded significantly, with increasing participation in:

• IPOs and follow-on offerings
• REITs and InvITs
• Structured and debt instruments

Merchant bankers now operate in a high-risk, high-value environment, requiring stronger balance sheets and liquidity buffers. The introduction of liquid net worth ensures that intermediaries have readily deployable resources, particularly relevant for underwriting obligations.

2. Strengthening Professionalism and Governance

The circular mandates:

• NISM certifications for relevant personnel
• Clear designation of Principal Officers and compliance personnel
• Segregation of compliance from revenue-generating functions

These measures align Indian regulation with global best practices, though not directly equivalent to U.S. investment banking regulations.

3. Market Entry vs Investor Protection

SEBI adopts a calibrated approach:

• Phased implementation for existing entities
• Higher entry thresholds for new applicants
• Minimum activity/revenue expectations to prevent dormant or shell registrations

The framework is likely to encourage consolidation, and improve overall market quality

4. Addressing Conflicts of Interest

Disclosure norms (including those under provisions such as Regulation 21C, where applicable) seek to manage conflicts where merchant bankers or affiliates have interests in issuer companies.

The approach is disclosure-based regulation, rather than outright prohibition, balancing market participation, and investor protection.

Conclusion

The January 2026 SEBI circular marks a significant strengthening of the merchant banking regulatory framework. By introducing:

• Enhanced capital adequacy norms
• A robust liquidity framework
• Stricter governance and compliance standards

SEBI aims to ensure that merchant bankers are financially sound, operationally capable, and aligned with investor protection objectives.

The phased transition provides regulatory stability, while higher thresholds are likely to filter out undercapitalised players and drive consolidation.

Overall, the reforms reflect SEBI’s shift toward a prudential, risk-sensitive regulatory model, consistent with the evolving scale and complexity of India’s capital markets.

1. (Circular No. HO/49/11/11(106)2025-CFD-RAC-DIL3/I/1796/2026). ↩︎