SEBI's New Merchant Banker Regulations: What They Mean for Your IPO

Most promoters treat the choice of merchant banker as a formality — pick a name with a track record, sign the mandate, move to the DRHP. That approach is now riskier than it looks. SEBI's new merchant banker regulations have restructured who is even allowed to run your issue, and the changes reach every company planning an SME or mainboard IPO over the next two to three years.

What a merchant banker actually does

The merchant banker, more precisely the Book Running Lead Manager (BRLM), is not just a bank that "manages" the offer. Under the SEBI ICDR framework, the lead manager is personally accountable for the accuracy of the offer document. Before the draft offer document is filed, the BRLM must submit a due diligence certificate in the prescribed format, confirming that:

• Disclosures in the draft prospectus are true, fair and adequate for an investor to make an informed decision

• Material contracts, litigation and related-party arrangements have been verified against the disclosures

• Securities forming the promoters' contribution have not been sold or encumbered during the lock-in verification period

Beyond due diligence, the BRLM runs pricing and book building, manages the underwriting syndicate, liaises with SEBI and the exchanges on observations, and, for SME issues, often also acts as the designated market maker after listing. It is the single point of accountability standing behind the issue.

SEBI's new merchant banker regulations: the two-category structure

SEBI notified the Merchant Bankers (Amendment) Regulations, 2025, effective from 3 January 2026, splitting merchant bankers into two categories by capital adequacy:

• Category I merchant bankers are authorised for the full range of activities, including managing mainboard IPOs. They must build net worth to Rs 25 crore by January 2027 and Rs 50 crore by January 2028, with part of it held as liquid net worth, plus a minimum cumulative revenue over the preceding three years.

• Category II merchant bankers, with a lower net worth requirement rising toward Rs 10 crore by 2028, can continue handling SME IPOs, rights issues, buybacks, open offers and private placements — but not mainboard IPO management.

For a company planning an SME listing today with an eye on migrating to the mainboard later, this distinction matters directly: a merchant banker capable of taking you through an SME IPO may not be eligible to lead a subsequent mainboard issue unless it holds, or upgrades to, Category I status.

The outsourcing restriction

The amendment also closes a practice common at the smaller end of the market: outsourcing core functions such as due diligence and drafting of offer documents to third parties while the registered merchant banker's name appeared on the cover. Core activities can no longer be outsourced, and existing outsourcing arrangements had to be wound down by 3 April 2026. Promoters should use this as a reason to ask direct questions about who on the merchant banker's own team actually performs the due diligence.

What this means when you pick a banker

A few practical filters are worth applying before signing a mandate letter:

• Confirm the merchant banker's current category against your listing route — SME platform, mainboard, or a planned move between the two

• Ask about in-house due diligence staffing rather than relying on brand reputation alone

• Expect the smaller end of the market to consolidate or exit as net worth thresholds rise, so weigh capital position alongside deal history

• Build a slightly longer lead time into your IPO calendar while the market adjusts to the new capital and staffing rules

The bottom line

The merchant banker is not a vendor selected on fee quotes alone — it is the party whose due diligence certificate stands behind your offer document. SEBI's tightened capital adequacy framework and outsourcing ban mean the pool of eligible bankers, particularly for mainboard issues, will look different over the next two to three years. Promoters and CFOs planning a listing should confirm a prospective banker's category, verify who performs the due diligence, and factor possible market consolidation into their timeline.

This article is for general information and does not constitute investment, legal or tax advice. Regulations change; please verify the current position or speak to a qualified adviser before acting.