Experts Reflect on Sebi’s Plan for Tougher Merchant Banking Norms
Overview of Sebi’s New Proposal
The Securities and Exchange Board of India (Sebi) has recently circulated a proposal aimed at reinforcing the operational standards for merchant bankers. This initiative includes introducing more stringent qualification criteria and increasing the net worth requirements. Mumbai currently hosts 224 registered merchant bankers, including notable firms like 360 ONE WAM Ltd, AK Capital Services Ltd, JM Financial Ltd, and Kotak Mahindra Capital Company Ltd. Sebi is accepting public comments on this proposal until September 18, following suggestions from its Primary Market Advisory Committee (PMAC).
Key Changes and Industry Reactions
Sebi has observed unauthorized activities by some merchant bankers, such as involvement in private placements for unlisted companies, advisory services for projects, and syndication of rupee term loans which go beyond the permitted scope. As a solution, Sebi has advised that, excluding banks and public financial institutions, merchant bankers should limit their operations to activities under Sebi’s jurisdiction. Those engaged in non-permissible activities must segregate these within two years from a specified date.
Furthermore, Sebi plans to prohibit activities requiring separate regulatory registrations and licenses that are unrelated to the securities market. The proposal also suggests an increment in the minimum net worth from ₹5 crore to ₹50 crore, aligning with recommendations from the Association of Investment Bankers of India (AIBI).
Mixed Feedback from Industry Experts
While many industry experts endorse Sebi’s strategy, believing it essential for attracting the right players to the market, concerns exist about the potential impact on smaller entities. Anjali Aggarwal, a partner at Corporate Professionals, supports the move, pointing out the rapid growth of merchant bankers, with 27 new registrations over the last three years. She highlights that these changes are crucial for ensuring due diligence within the market.
Sebi also proposes assigning categories to merchant bankers based on their net worth, requiring them to increase it within two years. For category 1, a merchant banker must demonstrate a net worth of at least ₹50 crore, and for category 2 a minimum of ₹10 crore. Furthermore, Sebi will cancel registrations of those failing to generate at least 50% of their net worth from permitted activities for three consecutive years.
Moreover, a minimum liquid net worth requirement is anticipated to serve as an entry barrier, ensuring that merchant bankers can handle underwriting and other obligations effectively.
Potential Challenges and Future Directions
Tarun Singh, from Highbrow Securities, notes that while the introduction of categories and minimum net worth thresholds is positive, it poses challenges for smaller or newer firms by potentially monopolizing the market for established giants. Such restrictions could stifle innovation and competitive spirit essential for a vibrant market. Singh suggests that Sebi’s ongoing rule revisions should maintain a balance, fostering an environment where smaller entities can thrive.
Lastly, to streamline regulation and prevent evasion through multiple registrations, Sebi has proposed that merchant bankers, aside from banks and public financial institutions, should maintain only a single registration per group.
Sebi’s plan for tougher merchant banking norms clearly indicates a move toward a more regulated and robust market environment, aiming to enhance stability and integrity in financial operations. However, ensuring that these regulations do not curb the dynamism of emerging players will be crucial for sustaining innovation and competition in the sector.
As it stands, the proposal from Sebi to intensify the regulatory framework for merchant banking operations in India presents a significant shift towards elevating the industry’s standards. To encapsulate the essence and the implications of these proposed changes, let us delve deeper into the potential benefits and the careful considerations that need to be addressed moving forward.
Prospective Benefits of Sebi’s Proposal
- Market Integrity and Stability: By enforcing stricter qualification criteria and financial thresholds for merchant bankers, Sebi aims to ensure that only entities with proven financial robustness and commitment are operational. This move is anticipated to enhance the market’s integrity and stability.
- Clarity in Permissible Activities: The delineation of allowable activities for merchant bankers under Sebi’s jurisdiction seeks to eliminate ambiguity, thus facilitating a transparent operational environment. This not only aids in regulatory compliance but also in strategic planning for merchant banking firms.
- Strengthened Due Diligence: The rise in the minimum net worth requirement is expected to act as a quality filter, ensuring that merchant bankers possess the necessary resources to conduct thorough due diligence. This is critical for protecting investors and maintaining trust in the capital markets.
Considerations for a Balanced Approach
While the initiative by Sebi is commendable and aimed at fostering a healthier market ecosystem, it is imperative to balance regulatory stringency with market vitality.
- Supporting Smaller Entities: The regulatory body should contemplate mechanisms to support emerging and smaller merchant bankers. Innovations such as incubation periods, phased compliance, or tiered regulatory requirements could offer smaller players the opportunity to grow without being stifled by immediate, hefty regulatory demands.
- Encouraging Innovation and Competition: To prevent a monopolistic market dominated by a handful of large players, it’s crucial to ensure that the regulatory framework encourages innovation, fair competition, and diversity. This includes considering the unique roles and contributions of newer, smaller entities in introducing innovative financial products and services.
- Continuous Dialogue with Stakeholders: The proposal’s impact varies across different segments of the industry. Ongoing dialogue between Sebi and stakeholders, including smaller merchant bankers, can help address concerns, refine proposals, and ensure that the final regulations are beneficial for all parties involved.
- Monitoring and Evaluation: Post-implementation, continuous monitoring of the market’s response and the effectiveness of these regulations will be necessary. This allows for timely adjustments and ensures that the regulation evolves in tandem with market dynamics.
Closing Remarks
In conclusion, Sebi’s plan for tougher merchant banking norms marks a pivotal step towards fortifying the infrastructure and governance of India’s capital markets. By drawing a fine line between rigorous oversight and fostering an inclusive, innovative financial ecosystem, the potential for advancing India’s economic landscape is immense. Estabizz Fintech Pvt Ltd, alongside its peers and competitors, is poised to navigate these regulatory waters, contributing to a market that is robust, transparent, and, above all, serves the best interest of the investing public.
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