Merchant banker
Also written Merchant banker (definition) · Merchant banking · Lead manager · Book running lead manager · BRLM · Investment banker
A SEBI-registered body corporate engaged in the business of issue management — arranging the selling, buying or subscribing of securities, or acting as manager, consultant or adviser in relation to an issue.
In plain language
A company that wants to raise money from the public cannot simply print a document and ask for cheques. Somebody licensed has to stand between the issuer and the investor, verify what the issuer says about itself, and put its own name and registration at risk on that verification. That somebody is the merchant banker.
The SEBI (Merchant Bankers) Regulations, 1992 define it 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".
Read that definition slowly. It is not about lending money and it is not about broking. It is about issue management — and the words "manager, consultant, adviser" are why the same firm appears in a takeover, a buy-back and a delisting as well as in an IPO.
How it works
What it may do. The SEBI-regulated activities are a closed list: managing public issues, QIPs and rights issues and advisory incidental to them; managing acquisitions and takeovers under SAST, buy-backs under the Buy-Back Regulations, delisting under the Delisting Regulations, LODR compliances for a scheme of arrangement, and schemes under the Share Based Employee Benefits and Sweat Equity Regulations; underwriting; private placement of listed or to-be-listed securities; managing international offerings; filing an AIF placement memorandum; issuing fairness opinions; managing secondary market transactions in listed securities; and market making under ICDR Chapter IX.
Who may be one. A body corporate or an LLP — but not a One Person Company, not an NBFC, and not a body corporate incorporated outside India other than a foreign bank licensed by the RBI. It must have adequate office space, equipment and manpower, and at least two employees professionally qualified in finance, law, accountancy or business management, holding the NISM-Series-IX certificate.
The two categories. Category I may carry out all the permitted activities. Category II may carry out all of them except public issues of equity shares proposed to be listed on the main board. A fresh application can be made only for Category I, accompanied by a non-refundable application fee of Rs 50,000.
What it costs. On intimation of the grant of the certificate the fees must be paid within 15 days. The registration fee is Rs 20 lakh. To keep registration in force, Rs 9 lakh every three years from the sixth year. Fail to pay and the merchant banker may undertake no new activity until it does, and owes interest at 15% per annum for each month of delay or part thereof.
What it must be worth. Regulation 7A phases the net worth and liquid net worth requirements:
| Category | Phase I — by 31 Mar 2027 | Liquid net worth | Phase II — by 31 Mar 2028 | Liquid net worth |
|---|---|---|---|---|
| Category I | Rs 25 crore | Rs 6.25 crore | Rs 50 crore | Rs 12.5 crore |
| Category II | Rs 7.5 crore | Rs 1.875 crore | Rs 10 crore | Rs 2.5 crore |
What it must earn. Cumulative revenue from permitted activities over the three immediately preceding financial years of at least Rs 25 crore for Category I and Rs 5 crore for Category II; first assessment with effect from April 1, 2029. Shortfall makes the registration liable to cancellation under summary proceedings — though SEBI weighs natural calamities, pandemics, global recession and geopolitical factors before cancelling.
A worked example
A Mumbai advisory firm registered as a merchant banker has net worth of Rs 28 crore, of which Rs 9 crore sits in cash and bank fixed deposits. Over FY24, FY25 and FY26 it billed Rs 6.4 crore, Rs 7.1 crore and Rs 8.8 crore = Rs 22.3 crore cumulative from permitted activities.
Can it stay Category I?
| Test | Requirement | The firm | Verdict |
|---|---|---|---|
| Net worth, Phase I | Rs 25 crore | Rs 28 crore | Passes |
| Liquid net worth, Phase I | Rs 6.25 crore | Rs 9 crore of cash and FDs, 0% haircut | Passes |
| Net worth, Phase II | Rs 50 crore | Rs 28 crore | Fails |
| Cumulative 3-year revenue | Rs 25 crore | Rs 22.3 crore | Fails |
It clears Phase I comfortably and then runs into a wall. Failing the Category I requirement at the end of Phase II means it is automatically designated a Category II merchant banker — it does not lose its registration, it loses the mainboard equity IPO business. As Category II it needs only Rs 10 crore net worth, Rs 2.5 crore liquid net worth and Rs 5 crore of cumulative revenue, all of which it has several times over.
The arithmetic of staying Category I is therefore stark: Rs 22 crore of fresh capital to reach Rs 50 crore of net worth, of which Rs 12.5 crore must sit in liquid assets earning very little, plus Rs 2.7 crore of extra fee income over three years — against a triennial registration fee of only Rs 9 lakh. The fee is trivial; the balance sheet is the barrier.
Why NISM asks about it
Chapter 3 is built on this and Chapter 2 (Introduction to the Merchant Banking) sets it up. The numbers in this entry are the single densest source of factual questions in the paper: the Rs 50,000 application fee, the Rs 20 lakh registration fee, the Rs 9 lakh every three years from the sixth year, the 15% per annum interest on delay, the 15-day payment window, the minimum of two professionally qualified employees, and each cell of the Regulation 7A table.
Chapter 3's own review question 1 asks how many professionally qualified people a merchant banker applicant must have in employment — the answer is 2.
Common exam traps
- Category II is not "smaller Category I". The single thing it may not do is a public issue of equity shares proposed to be listed on the main board. It may still manage takeovers, buy-backs, delistings, QIPs and debt issues.
- A fresh application can only be for Category I. Existing merchant bankers re-categorise; new ones enter at Category I.
- Rs 20 lakh is once; Rs 9 lakh is every three years starting from the sixth year — not annually, and not from year one.
- An NBFC cannot be a merchant banker, but a merchant banker registered by the RBI as a primary or satellite dealer may carry on that business provided it accepts no public deposit.
- Net worth and liquid net worth are two tests, not one. Rs 50 crore of net worth in illiquid assets fails Regulation 7A even though it passes Regulation 7.
- Revenue is cumulative over three financial years, not annual — and the first assessment is only from April 1, 2029.
- Failing Category I at Phase II is an automatic re-designation to Category II, not a cancellation. Failing Category II is worse: no fresh permitted activity at all until it complies.
Check yourself
1.A merchant banker applicant must have how many persons in its employment who are professionally qualified in finance, law, accountancy or business management?
- a)Two
- b)Five
- c)Seven
- d)Ten
Show the answer
Answer: (a) Two
The applicant has in its employment, a minimum of two persons who are professionally qualified in finance or law or accountancy or business management from a Government recognised university or institution or who have a recognised degree in finance or law or accountancy or business management from a foreign university or institution.
A minimum of two — and their qualification may be Indian or foreign.
They must also be certified: the employees referred to in clause (c) and the compliance officer shall possess such certification(s) as may be specified by the Board. It is, accordingly, specified that the employees of an applicant, shall possess the certificate for NISM Series-IX: Merchant Banking Certification Examination at the time of application.
For existing firms there are transitional deadlines: an existing employee shall obtain requisite certification within one year from effective date, i.e., on or before January 02, 2027, while the employees, who are appointed on or after January 3, 2026, shall be required to obtain requisite certification within ninety days from the date of his/her appointment.
The other eligibility conditions: the applicant must be a body corporate including a company... or a limited liability partnership firm but not a body corporate incorporated outside India other than a foreign bank licensed by the Reserve Bank of India, a One Person Company, or a non-banking financial company.
Plus the necessary infrastructure like adequate office space, equipment's and manpower, no adverse litigation connected with the securities market, no conviction for an offence involving moral turpitude or an economic offence, compliance with regulations 7 and 7A, and being a Fit and proper person.
These two employees matter later too. The 0.1% shareholding bar on lead managing extends to employees referred to in clause (b) of Regulation 6 and their relatives, and so does the Regulation 26 prohibition on trading on unpublished price sensitive information.
2.Registration fees payable by a merchant banker on grant of the certificate should be made by demand draft in favour of:
- a)Securities and Exchange Board of India, payable at Mumbai or the respective regional office
- b)The Association of Investment Bankers of India, payable at Mumbai
- c)The Reserve Bank of India
- d)The stock exchange on which the merchant banker is registered
Show the answer
Answer: (a) Securities and Exchange Board of India, payable at Mumbai or the respective regional office
The fees specified shall be payable by the merchant banker by way of direct credit in the bank account through NEFT/RTGS/IMPS or any other mode allowed by RBI or by a demand draft in favour of Securities and Exchange Board of India payable at Mumbai or at the respective regional office.
AIBI is the industry body, not the fee collector. As Chapter 2 explained, the industry body for merchant bankers in India that acts as a self-regulatory organisation is known as the Association of Investment Bankers of India (AIBI) — recognised by SEBI, but not a regulator and not a recipient of statutory fees.
The amounts: every Merchant Banker is required to pay a fee of Rs. 20 lakh as registration fees, preceded by a non-refundable application fee of Rs. 50,000/- with the Form A application.
And to keep it alive: a merchant banker who has been granted a certificate of registration, to keep its registration in force, shall pay a fee of nine lakh rupees every three years from the sixth year, from the date of grant of certificate of registration.
The timing: on being intimated of the grant of this certificate the merchant banker is required to pay the requisite fees... within 15 days of receipt of such intimation from SEBI.
And non-payment has two consequences, not one: the merchant banker shall not undertake any new activity till such time the fees is paid by the merchant banker, and shall also be liable to pay interest at 15% per annum for each month of delay or part thereof.
Paying fees is itself a condition of registration: the merchant banker shall pay the fees for registration in the manner as provided in these regulations.
3.What distinguishes a Category II merchant banker from a Category I merchant banker?
- a)Category II may carry out all permitted activities except public issues of equity shares proposed to be listed on the main board of a recognised stock exchange
- b)Category II may only advise, not manage issues
- c)Category II may not underwrite
- d)Category II may act only for unlisted companies
Show the answer
Answer: (a) Category II may carry out all permitted activities except public issues of equity shares proposed to be listed on the main board of a recognised stock exchange
(i) Category I, which can carry out all the permitted activities;
(ii) Category II, which can carry out all the permitted activities except public issues of equity shares proposed to be listed on the main board of a recognised stock exchange.
One exclusion only — but the most significant activity in the list.
New applicants have no choice: an application for registration made under this regulation shall be accompanied by a non-refundable application fee of Rs. 50,000/- and can be made only for Category I Merchant Banker.
Existing firms must pick one: a merchant banker that already holds a certificate of registration under these regulations shall re-categorise itself as Category I or Category II within such time period and in the manner, as may be specified by the Board — intimating SEBI on or before March 31, 2027... by email (mb@sebi.gov.in) regarding the category under which they intend to continue from April 1, 2027, with a Chartered Accountant-certified Net Worth Certificate.
The categories carry different capital requirements. In Phase I (on or before March 31, 2027), Category I ₹25 crore net worth and ₹6.25 crore liquid; Category II ₹7.5 crore and ₹1.875 crore. In Phase II (on or before March 31, 2028), ₹50 crore / ₹12.5 crore and ₹10 crore / ₹2.5 crore.
And different revenue requirements: Category I: at least Rs. 25 crore and Category II: at least Rs. 5 crore, cumulative over three immediately preceding financial years.
The consequences of falling short differ too. Failing Category I means being automatically designated as a Category II Merchant Banker; failing Category II means the firm shall not undertake any fresh permitted activity specified under Regulation 13A(1) until it complies.
Where this is taught
- Series IX · Chapter 1: Introduction to the Capital Marketintroduced here
- Series SEBI-ICE · Chapter 5: Investment in Securities Marketintroduced here
- Series XIX-C · Chapter 1: Investments Landscapeintroduced here
- Series XIX-B · Chapter 4: Category III AIF: Fund Structures and Service Providersintroduced here
- Series XII · Chapter 3: Primary Marketsintroduced here
- Series III-A · Chapter 13: SEBI (Merchant Bankers) Regulations 2025, SEBI (SAST) Regulations,introduced here
- Series IX · Chapter 3: Registration, Code of Conduct & General Obligations of Merchant Bankers in India
- Series XIX-C · Chapter 7: Alternative Investment Funds Ecosystem
Related terms
- SCORESSEBI's centralised web-based system for processing investor complaints, on which the company or intermediary must upload an Action Taken Report and the investor can watch the status online.
- Liquid Net WorthThe part of a merchant banker's net worth deployed in unencumbered liquid assets, counted after a prescribed haircut on each asset type — a second capital test that net worth alone cannot satisfy.
- Compliance OfficerThe separately appointed officer of a merchant banker, listed company or intermediary who monitors compliance with securities law, handles investor grievances, and reports non-compliance to SEBI independently.
- Primary marketThe market where an issuer sells securities to investors for the first time and receives the money itself — the "new issue market", as against the secondary market where investors trade among themselves.
- Red Herring ProspectusThe offer document used in a book-built public issue, containing every disclosure a prospectus carries except the final price or number of shares, filed with the Registrar before the issue opens.
- Due diligence certificateThe formal certificate a lead manager signs and files with SEBI at prescribed stages of an issue, confirming that it has verified the issuer's disclosures and that the offer document is compliant.
- Securities Appellate TribunalThe statutory tribunal established under the SEBI Act that hears appeals from orders of SEBI and of its adjudicating officers, which must be filed within 45 days of receipt of the order.
- Preferential issueAn issue of specified securities by a listed issuer to a select person or group on a private placement basis — excluding public, rights, bonus and ESOP issues, QIPs, sweat equity and overseas depository receipts.
- Reverse book buildingThe bidding process by which the exit price in a voluntary delisting is discovered from public shareholders above a fixed floor price, instead of being set by the acquirer.
- Escrow accountThe security an acquirer must deposit before a takeover open offer — 25% of the first Rs 500 crore of consideration plus 10% of the balance — so that the money to pay tendering shareholders is ring-fenced.
- Fit and proper personThe character and record test in Schedule II of the SEBI (Intermediaries) Regulations, 2008 that an AIF's applicant, sponsor and manager must satisfy for registration and must keep satisfying afterwards.
- Co-investmentInvestment by a manager, sponsor or investor of a Category I or II AIF directly into an investee company that the AIF is itself investing in, alongside the fund rather than through it.
- SettlorThe party who brings an AIF trust into existence — executing the trust deed with the trustee and conveying the initial sum that becomes the trust's first asset.