Revising Norms Governing Merchant Bankers Can Avoid Conflict Of Interest

The changes that are being proposed with regard to merchant bankers’ regulations are mainly intended to avoid conflict of interest while clarifying the activities that merchant bankers can undertake. It was discussed during the 208th board meeting of Securities & Exchange Board of India (SEBI), which focused on ease of doing business with respect to business responsibility and sustainability report and other relevant issues. SEBI has undertaken a comprehensive review of the SEBI (Merchant Bankers) Regulations, 1992, which lays down the regulatory framework for registration of merchant bankers, their eligibility, the activities they can undertake and revision in net worth, including liquid net worth criteria.

The amendments that have been mooted will confine merchant bankers to core activities that pertain to capital markets, including public issues, delisting, takeovers, and hive off non-issue related activities like valuation into a separate entity. The new entity must obtain approval from the respective regulator for such incidental activities.

The hive-off, as per BTG Advaya, may impact the standalone revenue of merchant bankers but will not impact their consolidated revenue. Further, the cool-off period granted to complete ongoing assignments will ensure that the migration of incidental activities to a new entity can occur without any disruption in the market or operations of the MBs. The latest net worth requirements will fortify MBs' resource base to match the expanding activities in the primary issue market. Overall, the measures will help MBs concentrate on their issue-related activities, indicating that the SEBI wants to be the trendsetter for issue management standards.

The merchant bankers, other than banks, public financial institutions and their subsidiaries, shall undertake only permitted activities. MBs may carry out other regulated activities as a separate business unit after obtaining registration and confirmation from the respective regulatory authority, as per the amendment. Permitted activities which come under the purview of SEBI have been specified.

Moreover, activities other than those permitted by MBs shall be hived off to a separate legal entity with a separate brand name, within a period of two years. MBs, which have to hive off activities and the hived off entity, shall abide by the code of conduct specified by SEBI from time to time. Restricting merchant bankers to solely focus on merchant banking could, as per SNG & Partners, Advocates & Solicitors, result in the separation of several other ancillary services they currently provide, such as investment banking.

This may significantly impact their revenue. The separate entity may be allowed to carry out activities other than the permitted activities by sharing the resources with the MB on an arm’s length basis without casting any legal liability in respect of the same, on them. MBs shall not undertake fresh valuation activities as part of their registration. However, the existing valuation assignments that have been taken up by MBs may be completed. If an MB wishes to take up valuation activities, it shall obtain registration from the concerned regulator or authority, within nine months.