The Securities and Exchange Board of India (Sebi) has proposed a significant overhaul of the regulations governing merchant bankers. The new norms aim to enhance the integrity and efficiency of the primary market by increasing the net worth requirements and tightening the eligibility criteria for merchant bankers. While some experts applaud these changes for promoting transparency and accountability, others express concerns about the potential challenges and unintended consequences. This article delves into the mixed reactions from industry experts regarding Sebi’s proposed regulations.
One of the most notable changes in Sebi’s proposal is the increase in the net worth requirement for merchant bankers from ₹5 crore to ₹50 crore. This tenfold increase is intended to ensure that only financially robust entities can operate in the market, thereby enhancing the overall stability and credibility of the primary market. Proponents argue that this move will weed out smaller, less reliable players and attract more serious and capable firms.
However, critics argue that the higher net worth requirement could create barriers to entry for smaller firms and startups. These entities may struggle to meet the new threshold, potentially stifling innovation and competition in the market. Additionally, there are concerns that the increased financial burden could lead to higher costs for issuers, as merchant bankers pass on the additional expenses to their clients.
The proposal also includes a requirement for merchant bankers to maintain a liquid net worth of at least 25% of the minimum net worth requirement. This measure aims to ensure that merchant bankers have sufficient liquidity to meet their obligations and manage risks effectively. While this is seen as a positive step towards enhancing financial stability, it may further strain the resources of smaller firms.
Enhanced Qualification and Experience Criteria
Sebi’s proposal also seeks to enhance the qualification and experience criteria for merchant bankers. For Category 1 merchant bankers, the regulator has proposed a minimum of five years of relevant experience for at least two employees. Additionally, Category 1 merchant bankers must have a minimum of five employees handling core merchant banking activities. These stricter criteria are designed to ensure that merchant bankers possess the necessary expertise and experience to perform their duties effectively.
Supporters of this move believe that it will lead to better due diligence and higher standards of service in the market. By ensuring that merchant bankers have adequate experience and qualifications, Sebi aims to reduce the risk of misconduct and improve the overall quality of market intermediaries. This, in turn, is expected to boost investor confidence and promote a more transparent and efficient market.
On the other hand, some experts caution that the enhanced criteria could exacerbate the talent shortage in the industry. Smaller firms may find it challenging to attract and retain qualified professionals, given the increased competition for experienced talent. This could lead to a concentration of expertise in larger firms, potentially reducing diversity and innovation in the market.
Implications for Market Dynamics
The proposed regulations are likely to have far-reaching implications for the dynamics of the primary market. By raising the bar for entry and operation, Sebi aims to create a more robust and reliable ecosystem. However, the potential impact on smaller firms and the overall market structure cannot be overlooked. The increased financial and operational requirements may lead to consolidation in the industry, with larger firms gaining a more dominant position.
Moreover, the new norms could influence the cost and accessibility of capital for issuers. As merchant bankers adjust to the stricter regulations, they may pass on the additional costs to their clients, potentially making it more expensive for companies to raise funds in the primary market. This could particularly affect smaller and mid-sized companies, which may already face challenges in accessing capital.
In conclusion, Sebi’s proposed regulations for merchant bankers have elicited mixed reactions from industry experts. While the changes are aimed at enhancing market integrity and stability, they also pose challenges for smaller firms and could impact market dynamics. As the consultation process continues, it will be crucial for Sebi to carefully consider the feedback from stakeholders and strike a balance between promoting transparency and ensuring a competitive and inclusive market.
