The Securities and Exchange Board of India (Merchant Bankers) Regulations, 1992 were the very first set of intermediary regulations SEBI notified after acquiring statutory teeth under the SEBI Act, 1992. Made on 22 December 1992 under section 30 of the Act, they converted what had until then been an informal Ministry of Finance authorisation regime into a registration-based, code-bound discipline. The merchant banker is the architect of every public issue, open offer and corporate restructuring in India; these Regulations make that architect personally answerable to SEBI for the truth and adequacy of what reaches the investing public. This chapter unpacks the registration scaffolding, the capital adequacy threshold, the Schedule III Code of Conduct and the rich body of Securities Appellate Tribunal jurisprudence on due diligence that gives the dry text its bite.
Statutory source and the scheme of the Regulations
The Regulations draw their authority from section 30 of the Securities and Exchange Board of India Act, 1992, under which the Board, with the previous approval of the Central Government, may make regulations consistent with the Act. Read with section 12(1) of the Act, no person may carry on the activity of any intermediary, including a merchant banker, without obtaining a certificate of registration from the Board. The 1992 Regulations therefore operationalise the section 12 prohibition for one specific class of intermediary.
Structurally the instrument is lean. Chapter I (regulations 1 and 2) deals with the short title and definitions; Chapter II (regulations 3 to 12) governs registration; Chapter III (regulations 13 to 28A) sets out the general obligations and responsibilities, including the Code of Conduct; Chapter IV (regulations 29 to 34) provides for inspection; and Chapter V (regulation 35) fixes liability for action in default. Three working schedules survive: Schedule I (forms), Schedule II (fees) and Schedule III (the Code of Conduct), with Schedule IV prescribing the half-yearly reporting format. Many of the original Chapter III obligations dealing with the mechanics of an issue were omitted in 2009 and migrated into the SEBI intermediaries framework through the ICDR Regulations, 2009, so the Merchant Bankers Regulations today are essentially a registration-and-conduct charter rather than an issue-process manual.
For the broader architecture of how SEBI regulates all its registered intermediaries through a single procedural code, see the companion chapter on the Common Framework under the Intermediaries Regulations, 2008.
Who is a 'merchant banker'? Regulation 2(cb)
The definition is the doctrinal heart of the Regulations. As inserted by the 2006 (Third Amendment) Regulations, regulation 2(cb) defines a "merchant banker" as any person who is engaged in the business of issue management either by making arrangements regarding selling, buying or subscribing to securities or acting as manager, consultant, adviser or rendering corporate advisory service in relation to such issue management. The accent is on issue management: it is the connection with an offer of securities that brings a person within the net, not the mere giving of financial advice.
Regulation 2(ca) correspondingly defines an "issue" as an offer of sale or purchase of securities by a body corporate or other person to or from the public, or to existing securities-holders, through a merchant banker. Regulation 2(d) identifies the "principal officer" (the proprietor, partner or responsible director), which matters because the fit-and-proper and litigation disqualifications in regulation 6 attach to that officer as well as to the applicant entity. A person who only manages portfolios, or only underwrites without managing the issue, is regulated under separate intermediary regulations; the merchant banker is distinctively the manager of the offering itself.
The phrase "corporate advisory service in relation to such issue management" was deliberately added in 2006 to capture the full spectrum of modern investment-banking work, including advice on capital structure, mergers, demergers and restructuring that culminates in an offer of securities. The definition is functional rather than nominal: a person calling itself a financial consultant who in substance arranges the buying, selling or subscribing of securities for the public falls within regulation 2(cb) and cannot escape registration merely by avoiding the label "merchant banker." This substance-over-form reading is consistent with section 12 of the SEBI Act, which prohibits the carrying on of the activity, not merely the use of a designation, without registration.
The four original categories and their collapse into one
When notified in 1992, regulation 3(2) created four graded categories. Category I could carry on the full activity of issue management (preparation of the prospectus, determining the financial structure, tie-up of financiers, allotment and refund) and could additionally act as adviser, consultant, manager, underwriter and portfolio manager. Category II could act as adviser, consultant, co-manager, underwriter and portfolio manager; Category III as underwriter, adviser and consultant to an issue; and Category IV only as adviser or consultant to an issue.
This tiered system was abolished prospectively. Regulation 3(2A), inserted with effect from 9 December 1997, provides that an application can be made only for the Category I activities, and that an applicant may act as a portfolio manager only if it obtains a separate certificate under the SEBI (Portfolio Managers) Regulations, 1993. The practical result is that since December 1997 there is effectively a single class of merchant banker, equivalent to the old Category I, and Form A no longer carries the "Applied for II/III/IV" option. The historical categories nonetheless remain examinable because they explain the graded net-worth ladder discussed below. The functional content of each tier is developed further in the sibling chapter on merchant banker categories and functions.
Registration: application and eligibility (Regs 3 to 6A)
An applicant seeks registration by filing Form A under regulation 3(1), accompanied by the non-refundable application fee prescribed in Schedule II (regulation 3(1A)). Regulation 4 mandates rejection of an incomplete application, but only after giving the applicant an opportunity to cure the defects, and regulation 5 empowers the Board to call for further information and for the personal appearance of the principal officer.
Regulation 6 lists the substantive eligibility criteria the Board must weigh. The applicant must be a body corporate (and not a non-banking financial company as defined under section 45-I(f) of the Reserve Bank of India Act, 1934), must possess adequate office infrastructure and manpower, and must employ at least two persons with the experience to conduct merchant banking business. A person directly or indirectly connected with the applicant must not already hold registration; the applicant, its directors, partners or principal officer must not be embroiled in securities-market litigation that adversely bears on the business, nor have been convicted of an offence involving moral turpitude or any economic offence; and the applicant must hold a professional qualification in finance, law or business management. Critically, regulation 6(gg) requires the applicant to be a fit and proper person, regulation 6(d) requires satisfaction of the capital adequacy norm, and regulation 6(h) requires that the grant be in the interest of investors. Regulation 6A directs that fit-and-proper status be assessed against the criteria in the SEBI (Intermediaries) Regulations, 2008, anchoring this Regulation to the common intermediaries code.
Capital adequacy: the net worth requirement (Reg 7)
Regulation 7 is the most frequently tested numerical provision. In its current form, substituted by the 2006 (Third Amendment) Regulations, it requires a single net worth threshold: the capital adequacy requirement referred to in regulation 6(d) shall be a net worth of not less than five crore rupees. The Explanation defines net worth as the sum of the paid-up capital and free reserves of the applicant at the time of making the application under regulation 3(1).
The history is worth remembering for examinations. As originally framed in 1992, regulation 7 prescribed a graded ladder keyed to category: Category I, Rs 1,00,00,000 (one crore); Category II, Rs 50,00,000; Category III, Rs 20,00,000; and Category IV, nil. The Category I figure was raised from Rs 1 crore to Rs 5 crore by the SEBI (Merchant Bankers) (Amendment) Regulations, 1995, with effect from 7 September 1995, and the single flat figure of Rs 5 crore was carried into the 2006 substitution once categories had collapsed. The net worth is not a one-time entry barrier: regulation 9A(1)(d) makes its maintenance a continuing condition of registration "at all times" during the validity of the certificate, and regulation 28(1)(iv) requires the merchant banker to disclose to the Board any breach of the regulation 7 requirement. Failure to maintain net worth is a live ground of enforcement, as SEBI's suspension of First Overseas Capital's certificate for a net-worth shortfall over FY19 to FY21 illustrates.
Grant, renewal, validity and fees (Regs 8 to 12)
Once satisfied of eligibility, the Board grants a certificate in Form B under regulation 8(1), whereupon the applicant becomes liable to pay the registration fee under Schedule II. Regulation 9 governs renewal: the merchant banker may apply for renewal in Form A three months before expiry, with the non-refundable fee, and the renewal application is dealt with as if it were a fresh application. Regulation 9A sets out the conditions of registration, the most important being prior approval before any change of status or constitution (regulation 9A(1)(a)), timely payment of fees, redressal of investor grievances within one month of receipt of a complaint, continuous maintenance of capital adequacy, and abidance by all SEBI regulations applicable to its activity.
Regulation 9B fixes the period of validity of a certificate (and of any renewal) at three years from the date of issue. Regulation 10 deals with refusal: an application that does not meet the regulation 6 criteria may be rejected only after an opportunity of being heard, the refusal must be communicated within thirty days with reasons, and an aggrieved applicant may seek reconsideration within thirty days. Regulation 11 requires a refused applicant to cease all merchant banking activity from the date of the refusal communication. Regulation 12 ties continued operation to fee payment: failure to pay the annual fee empowers the Board to suspend the certificate, during which the merchant banker must cease to act as such.
The Code of Conduct (Reg 13 and Schedule III)
Regulation 13 is deceptively short: Every merchant banker shall abide by the Code of Conduct as specified in Schedule III. The substance lives in Schedule III, a list of twenty-eight obligations that functions as the operative conduct standard and is the provision most often invoked in enforcement. A merchant banker must protect investor interests (clause 1); maintain high standards of integrity, dignity and fairness (clause 2); fulfil obligations promptly, ethically and professionally (clause 3); and, most importantly, at all times exercise due diligence, ensure proper care and exercise independent professional judgment (clause 4).
Other clauses require timely and adequate disclosure to investors (clause 6), prohibit misleading or exaggerated claims (clause 7), forbid untrue statements or suppression of material facts in documents furnished to the Board (clause 20), require avoidance and disclosure of conflicts of interest (clauses 11 to 13), mandate confidentiality of client information (clause 15), prohibit unfair competition such as weaning clients away by promises of higher premium (clause 17), and require an arm's-length relationship between merchant banking and other activities (clause 18). Clauses 25 to 28 require empowerment of the compliance officer, an internal code of conduct, good corporate governance and a fit-and-proper standard for those employed to conduct business. Because regulation 13 is the gateway through which Schedule III bites, an enforcement order will typically read "violation of regulation 13 read with Clause [x] of the Code of Conduct." The same drafting technique recurs across SEBI intermediaries; compare the parallel discipline imposed on brokers in the stock brokers' code of conduct.
Restriction to securities-market business (Reg 13A)
Regulation 13A, inserted by the 1997 Amendment with effect from 9 December 1997, embodies a deliberate ring-fencing policy. With effect from 30 June 1998, no merchant banker, other than a bank or a public financial institution, may carry on any business other than that in the securities market. The object is to insulate the issue-management function from the credit and fund-based risks of leasing, lending or deposit-taking, so that a merchant banker's solvency and independence are not compromised by unrelated commercial exposures. A transitional protection allows a merchant banker who had entered into a non-securities contract before the 1997 notification to discharge its existing obligations under that contract.
The Explanation clarifies that a "bank" means a banking company under section 5 of the Banking Regulation Act, 1949 (and the nationalised and State Bank entities), and a "public financial institution" carries the meaning under section 4A of the Companies Act, 1956. Provisos added in 1999 and 2010 permit a merchant banker registered as a primary or satellite dealer by the RBI to carry on that activity, and permit market-making under Chapter XA of the ICDR Regulations, 2009. The carve-out for banks and PFIs explains why entities such as SBI Capital Markets operate both as bankers and as merchant bankers without breaching regulation 13A.
Books of account, records and reporting (Regs 14 to 17, 27, 28)
Regulation 14 requires every merchant banker to keep a copy of the balance sheet, profit and loss account, the auditor's report and a statement of financial position for each accounting period, to intimate the Board of the place where these are maintained, and to furnish copies for up to five preceding accounting years on demand. Regulation 15 requires submission of half-yearly unaudited financial results when called for, expressly so that the Board can monitor capital adequacy, dovetailing with the continuous net-worth obligation under regulation 9A. Regulation 16 fixes a minimum preservation period of five years for these books and records, and regulation 17 requires the merchant banker to take steps within two months to rectify deficiencies flagged in the auditor's report.
Regulation 27 obliges the merchant banker to report to the Board, within fifteen days, any transaction for acquisition of securities of a body corporate whose issue it is managing, and regulation 28 requires disclosure to the Board of its responsibilities for an issue, any change in previously furnished particulars bearing on the certificate, the bodies corporate whose issues it has managed, any breach of the regulation 7 net-worth requirement, and its role as manager, underwriter, consultant or adviser. Regulation 28(2) additionally requires a half-yearly report in the Schedule IV format within three months of the close of each half-year ending 31 March and 30 September.
Lead managers, underwriting and conflict of interest (Regs 20 to 26)
Although the detailed issue-process obligations were largely omitted into the ICDR Regulations in 2009, several structural duties survive. Regulation 20 prohibits any lead manager from managing or associating with an issue unless its responsibilities for disclosures, allotment and refund are clearly defined, allocated and reduced to a statement furnished to the Board at least one month before the issue opens; where there are multiple lead managers, each one's responsibilities must be separately demarcated. Regulation 21 forbids a lead manager from associating with an issue if an unregistered merchant banker is involved. Regulation 21A, inserted in 2009, bars a merchant banker from lead-managing an issue of an associate (broadly, a fifteen per cent voting-rights relationship, common control, or a common director), subject to a narrow exception where it is involved only in marketing the issue, codifying the conflict-of-interest principle in clause 11 of the Code.
Regulation 22 preserves a residual underwriting obligation: a Category I lead manager must accept a minimum underwriting commitment of five per cent of the total underwriting or rupees twenty-five lakh, whichever is less, with a 2010 proviso requiring at least fifteen per cent underwriting in a Chapter XA (SME) issue. Regulation 26 prohibits insider dealing by the merchant banker, its directors, partners, managers or principal officers, on the basis of unpublished price-sensitive information obtained during a professional assignment. For the analogous capital and exposure norms imposed on the broking side, compare the stock brokers' capital adequacy regime.
Due diligence: the merchant banker as gatekeeper
The single most important judicial theme under these Regulations is the standard of due diligence demanded of a lead manager. The duty flows from clause 4 of the Code of Conduct and from the due-diligence certificate the merchant banker furnishes to SEBI affirming that the disclosures in the offer document are true, fair and adequate. The Securities Appellate Tribunal has repeatedly characterised the merchant banker as an expert body and a gatekeeper of the primary market, whose due-diligence responsibility is independent and non-delegable: it cannot be passed on to the issuer, the acquirer or any other intermediary, and the banker must take proactive steps to verify material information rather than merely relying on what the client supplies. This gatekeeping conception underlies SEBI's enforcement against merchant bankers in open offers, including the February 2008 proceedings against HSBC Securities and Capital Markets (India) Private Ltd.
The standard cuts both ways, however. In Enam Securities Private Limited v. SEBI (SAT Appeal No. 39 of 2011, decided 2012), SEBI's Adjudicating Officer had by order dated 31 December 2010 imposed a penalty of Rs 25 lakh on Enam for violation of regulation 13 read with the disclosure guidelines, alleging failure to exercise due diligence in disclosing whether Rabobank International Holding B.V. was a promoter in the Yes Bank IPO prospectus. The SAT set aside the order, holding that Rabobank was not a promoter on the definitional material, that the discretionary QIB allocation was not arbitrary, and that Enam had discharged its supervisory duties; the case confirms that due diligence is judged on the facts and that an honest professional judgment, reasonably formed, will not attract penalty.
The dividing line that emerges from this jurisprudence is between verification and clairvoyance. A merchant banker must independently examine the primary record, cross-check the disclosures in the offer document against contemporaneous regulatory correspondence, board minutes and statutory filings, and apply professional scepticism rather than passively accepting management representations. What it is not required to do is guarantee outcomes or anticipate every contingency. The certificate the lead manager files with SEBI is therefore a representation about the diligence of its process and the adequacy of disclosure as at the date of the offer, not an insurance against the venture's commercial failure. This is why the liability attaches to the suppression of material facts known or knowable on reasonable enquiry, as in the forest-clearance episode discussed in the next section, rather than to mere hindsight about how an issue performed.
Liability for non-disclosure: Electrosteel and the materiality test
Where material information is in fact withheld, the lead manager's liability is real. In Electrosteel Steels Limited v. SEBI (SAT order dated 14 November 2019), the controversy concerned the IPO of Electrosteel Steels Limited, whose offer document did not disclose that the Ministry of Environment and Forest had rejected an application by the promoter, Electrosteel Castings Limited, for diversion of forest land for an iron-ore mine. SEBI, by order dated 31 March 2016, had imposed a penalty of Rs 1 crore each on the company and the book-running lead managers under regulations 57(1) and 57(2)(a) of the ICDR Regulations, 2009. The SAT upheld the factual finding that the MoEF rejection was material information that ought to have been disclosed in the offer document and that the merchant bankers had failed to exercise due diligence to ascertain its implications, while reducing the quantum of penalty.
Two doctrinal points emerge. First, although the charging provisions in Electrosteel were the post-2009 ICDR disclosure regulations rather than regulation 13 itself, the substantive duty is the same clause-4 due-diligence obligation that has merely migrated location, so the case remains the leading authority on a merchant banker's disclosure liability. Second, the SAT's willingness to uphold liability but moderate penalty reflects its settled position that its remedial jurisdiction operates within the statutory framework of the Act and Regulations and is exercised proportionately to the gravity of the default.
Inspection and action in default (Regs 29 to 35)
Chapter IV equips SEBI with supervisory muscle. Regulation 29 empowers the Board to appoint an inspecting authority to examine a merchant banker's books and records to verify compliance, investigate investor complaints, or act suo motu in the interest of the securities business. Regulation 30 requires reasonable prior notice, save where the Board records in writing that, in investor interest, inspection should proceed without notice. Regulation 31 casts a duty on every director, partner, officer and employee to produce records, allow reasonable access to premises, and extend full assistance; regulation 32 requires the inspecting authority to submit its report to the Board; and regulation 34 allows appointment of a qualified auditor with the powers of an inspecting authority.
The enforcement consequence is fixed by regulation 33 and regulation 35. Following the 2008 integration, regulation 33 provides that after considering the inspection or investigation report the Board or Chairman may take such action as it deems fit, including action under Chapter V of the SEBI (Intermediaries) Regulations, 2008. Regulation 35 makes a merchant banker who contravenes the Act, rules or Regulations liable to one or more of the actions specified there, again including action under Chapter V of the 2008 Regulations. The original enquiry-and-penalty machinery in regulations 36 to 43 was omitted in 2002 and the unified enforcement procedure now resides in the Intermediaries Regulations. The available penalties range from warning to suspension to cancellation of the certificate, as seen in SEBI's three-month suspension of Swaraj Shares and Securities for due-diligence failures and grievance-mechanism lapses, and in the cancellation of Karvy Investor Services' merchant-banker registration for want of the regulation 6 infrastructure on inspection.
Examination pointers and cross-links
For rapid revision, fix the load-bearing numbers: registration application in Form A (regulation 3); single net worth of Rs 5 crore (regulation 7), historically Rs 1 crore for Category I in 1992 and raised to Rs 5 crore in 1995; certificate validity of three years (regulation 9B); the four original categories collapsed into one with effect from 9 December 1997 (regulation 3(2A)); the Code of Conduct in Schedule III with clause 4 due diligence as its keystone (regulation 13); the bar on non-securities business from 30 June 1998 (regulation 13A); the five-year record-preservation period (regulation 16); and enforcement routed through Chapter V of the SEBI (Intermediaries) Regulations, 2008 (regulations 33 and 35).
On the case law, remember Enam Securities for the proposition that due diligence is fact-specific and a reasonable professional judgment is protected, and Electrosteel Steels for the materiality test and the lead manager's non-delegable disclosure duty. To place merchant bankers within the wider SEBI intermediary system, study them alongside the Stock Brokers Regulations, 1992 and the unifying Intermediaries Regulations, 2008, returning to the SEBI intermediaries hub for the full map.
Frequently asked questions
What is the minimum net worth required to register as a merchant banker under the 1992 Regulations?
Under regulation 7 as it now stands (substituted in 2006), a merchant banker must have a net worth of not less than Rs 5 crore, calculated as paid-up capital plus free reserves at the time of application. When the Regulations were first notified in 1992 the figure for Category I was Rs 1 crore; this was raised to Rs 5 crore by the 1995 Amendment with effect from 7 September 1995. The net worth must be maintained at all times under regulation 9A(1)(d), not merely at entry.
How many categories of merchant bankers are there today?
Effectively one. The 1992 Regulations originally created four categories under regulation 3(2), graded by activity and net worth. With effect from 9 December 1997, regulation 3(2A) provided that applications could be made only for the erstwhile Category I activities, so there is now a single class of full-service merchant banker, with portfolio management requiring a separate registration under the Portfolio Managers Regulations, 1993.
What is the role of the Code of Conduct in Schedule III?
Regulation 13 simply requires every merchant banker to abide by the Schedule III Code of Conduct, which contains twenty-eight obligations covering integrity, due diligence, adequate disclosure to investors, avoidance of conflicts of interest, confidentiality and fair competition. Because regulation 13 is the charging gateway, enforcement orders are framed as a violation of regulation 13 read with the relevant Code clause. Clause 4, the duty to exercise due diligence and independent professional judgment, is the most litigated provision.
Can a merchant banker carry on other businesses such as lending or leasing?
No, subject to exceptions. Regulation 13A, effective 30 June 1998, prohibits a merchant banker, other than a bank or a public financial institution, from carrying on any business outside the securities market. The policy is to insulate issue management from fund-based risks. Provisos permit RBI-registered primary or satellite dealers to continue that activity and allow market-making under Chapter XA of the ICDR Regulations, 2009.
What standard of due diligence does the Securities Appellate Tribunal expect from a lead manager?
The SAT treats the merchant banker as an expert gatekeeper whose due-diligence duty under clause 4 of the Code is independent and non-delegable. In Enam Securities Private Limited v. SEBI (SAT Appeal No. 39 of 2011), the Tribunal set aside a Rs 25 lakh penalty, holding that a reasonable professional judgment, fairly formed, is protected and that due diligence is judged on the facts. But in Electrosteel Steels Limited v. SEBI (SAT order dated 14 November 2019) liability was upheld where the lead managers failed to disclose a material MoEF rejection in the offer document.
How is a merchant banker penalised for breach of the Regulations?
Following the 2008 integration, regulations 33 and 35 route enforcement through Chapter V of the SEBI (Intermediaries) Regulations, 2008. After inspection or investigation, the Board may impose actions ranging from a warning to suspension or cancellation of the certificate of registration. Recent examples include SEBI's three-month suspension of Swaraj Shares and Securities for due-diligence and grievance lapses and the cancellation of Karvy Investor Services' registration for failing the regulation 6 infrastructure requirement on inspection.