Introduction

The Securities and Exchange Board of India (SEBI) enacted the Underwriters Regulations in 1993 to establish a comprehensive regulatory framework for entities that provide underwriting services for securities in public offerings. These regulations emerged as part of SEBI’s broader mandate to develop India’s primary markets while protecting investor interests. Underwriting, as a market function, serves the critical purpose of mitigating issuance risk by providing assurance that public offerings will raise the intended capital regardless of market reception. Underwriters commit to purchasing unsubscribed portions of issues, thereby providing certainty to issuers while simultaneously serving as gatekeepers who conduct due diligence on offering quality. By creating a structured regulatory regime for underwriters, the SEBI (Underwriters) Regulations 1993 aimed to establish professional standards, ensure financial capacity for meeting underwriting commitments, and promote ethical practices in an activity central to primary market integrity. The regulations recognized that effective underwriting was essential not only for individual issuance success but for broader market development and investor confidence in the capital formation process.

Historical Context and Legislative Evolution of SEBI (Underwriters) Regulations

The SEBI (Underwriters) Regulations emerged during the formative period of India’s securities market reforms in the early 1990s. Prior to these regulations, underwriting activities were conducted without specialized regulatory oversight, creating inconsistent practices, unclear standards, and uncertain commitments. The market liberalization following the 1991 economic reforms led to a surge in public offerings, highlighting the need for a robust regulatory framework for underwriting services.

The regulations were promulgated under Section 30 of the SEBI Act, 1992, which empowers SEBI to make regulations consistent with the Act. Their introduction coincided with a period of significant primary market activity, with numerous companies accessing public markets for the first time. This created an imperative for professionalized underwriting services to support market development while maintaining appropriate standards.

Over the years, these regulations have evolved through several amendments:

1. The original SEBI (Underwriters) Regulations, 1993 established the basic registration framework and operational standards.
2. The 2006 amendments enhanced capital adequacy requirements and clarified obligations.
3. The 2011 revisions strengthened the governance framework and updated operational standards.
4. The 2017 amendments refined disclosure requirements and modernized underwriting practices.

While the core regulatory framework has remained relatively stable, SEBI has issued numerous circulars and guidelines that have substantially evolved underwriting practices beyond the original regulatory text. These have addressed issues including pricing methodologies, green shoe options, anchor investors, and the role of underwriters in different offering structures such as book-built issues, qualified institutional placements, and rights offerings.

The most significant evolution in underwriting practices has occurred through changes in the broader primary market framework rather than through direct amendments to the Underwriters Regulations themselves. The introduction of book building in the late 1990s, the development of anchor investor mechanisms in the 2000s, and the recent emergence of specialized offering formats for different issuer categories have all transformed underwriting practices while operating within the fundamental regulatory architecture established by these regulations.

Underwriters’ Registration & Eligibility under SEBI Regulations

Chapter II: SEBI Registration Framework for Underwriters

Chapter II of the regulations establishes the registration requirements for underwriters. Regulation 3 states:

“No person shall act as underwriter unless he holds a certificate granted by the Board under these regulations:

Provided that a merchant banker who has been granted a certificate of registration to act as a merchant banker may act as underwriter without obtaining a separate certificate under these regulations.”

This provision establishes SEBI’s regulatory authority over underwriters while creating an important carve-out for registered merchant bankers, recognizing the natural alignment between merchant banking and underwriting functions.

Eligibility Criteria for Underwriters under SEBI Regulations

Regulation 6 outlines the comprehensive eligibility criteria for registration:

“The Board shall not grant a certificate to an applicant unless: (a) the applicant is a body corporate other than a non-banking financial company; (b) the applicant has the necessary infrastructure like adequate office space, equipment and manpower to effectively discharge his activities; (c) the applicant, his directors or partners, as the case may be, are persons of integrity with adequate professional qualification and experience in underwriting or in the business of buying, selling or dealing in securities; (d) the applicant fulfils the capital adequacy requirements specified in regulation 7; (e) the applicant, his director, partner or principal officer is not involved in any litigation connected with the securities market which has an adverse bearing on the business of the applicant; (f) the applicant, his director, partner or principal officer has not at any time been convicted for any offence involving moral turpitude or has been found guilty of any economic offence; (g) the applicant has no past record of repeated defaults in meeting underwriting commitments.”

These eligibility requirements reflect the significant financial and market responsibilities borne by underwriters, with emphasis on integrity, professional qualification, and infrastructure capability.

Capital Adequacy Norms for SEBI-Registered Underwriters

Regulation 7 establishes critical capital adequacy requirements:

“The capital adequacy requirement referred to in regulation 6 shall not be less than the net worth of rupees twenty lakhs:

Provided that a merchant banker deemed to be an underwriter under these regulations, shall have a networth of rupees five crores.”

This significant capital requirement (Rs. 20 lakhs for dedicated underwriters and Rs. 5 crores for merchant bankers acting as underwriters) ensures that underwriters have sufficient financial capacity to meet their potential obligations in case of issue devolvement. The substantially higher requirement for merchant bankers reflects their broader role in the primary market and the typically larger offerings they underwrite.

Application & Evaluation of Underwriters under SEBI Regulations

Regulations 4-8 establish a comprehensive application and evaluation process:

1. Detailed application containing information about organizational structure, financial resources, and underwriting experience
2. Due diligence of key personnel to ensure integrity and professional competence
3. Assessment of financial capacity to meet potential underwriting commitments
4. Evaluation of infrastructure for risk assessment and management
5. Review of past underwriting performance and commitment fulfillment

Upon successful evaluation, SEBI grants a certificate of registration, valid for three years and subject to renewal. This structured entry screening ensures that only qualified entities with appropriate resources and professional capabilities can function as underwriters.

General Obligations and Responsibilities of Underwriters under SEBI Regulations

Chapter III: Core Obligations for Underwriters

Chapter III establishes fundamental obligations for underwriters. Regulation 12 mandates:

“(1) No underwriter shall derive any direct or indirect benefit from underwriting the issue other than the commission or brokerage payable under the agreement for underwriting.

(2) The total underwriting obligations at any time shall not exceed 20 times the net worth of the underwriter.

(3) Every underwriter shall submit to the Board half-yearly reports about the underwriting activity undertaken and the underwriting obligations discharged.”

These core provisions establish critical safeguards:

1. The prohibition against benefits beyond specified commission prevents conflicts of interest and undisclosed arrangements.
2. The leverage limit of 20 times net worth creates a prudential ceiling on total commitments relative to financial capacity.
3. The regular reporting requirement enables regulatory monitoring of underwriting activity and potential systemic risk.

SEBI Regulations on Underwriting Agreements

Regulation 13 establishes requirements for underwriting agreements:

“(1) Every underwriter shall enter into an agreement with the body corporate on whose behalf he is acting as underwriter. (2) The agreement shall, among other things, provide for the following: (a) the period within which the underwriter shall subscribe to the issue after being intimated by or on behalf of such body corporate; (b) the amount of commission or brokerage payable to the underwriter; (c) the amount which the underwriter has to subscribe to or procure subscriptions for.”

This requirement ensures clarity regarding the underwriter’s commitments and compensation, preventing ambiguity that could lead to disputes or default on obligations.

SEBI Regulations on Underwriters Code of Conduct   

Schedule III contains a detailed code of conduct for underwriters. Key provisions include:

1. Maintaining high standards of integrity, dignity, and fairness in all dealings
2. Conducting appropriate due diligence on issues being underwritten
3. Maintaining independence and objectivity in underwriting decisions
4. Disclosing potential conflicts of interest to issuers and investors
5. Honoring underwriting commitments without delay when devolvement occurs
6. Cooperating with other underwriters and market participants

These ethical standards complement the operational requirements, creating a comprehensive framework for underwriter behavior.

Significant Court Decisions on SEBI Underwriters Regulations

SBI Capital Markets v. SEBI (2009)

This SAT appeal addressed the fundamental nature of underwriting obligations. SBI Capital Markets had challenged SEBI’s order regarding failure to fulfill underwriting commitments in a public issue. The tribunal’s judgment established:

“The underwriting obligation represents a firm commitment rather than a best-efforts arrangement, creating a legally binding obligation to subscribe to unsubscribed portions of an issue when devolvement occurs. This commitment forms the essence of underwriting as a market function, providing certainty to issuers regarding capital raising while serving as a signal of issue quality to potential investors.

The timing requirement for fulfilling underwriting obligations upon devolvement is substantive rather than merely procedural. Prompt fulfillment is essential not merely for regulatory compliance but for maintaining market integrity and issuer financial planning. Delays in meeting underwriting commitments, even when eventually fulfilled, constitute a regulatory violation that undermines the underwriting function.

The evaluation of whether market conditions constitute ‘force majeure’ sufficient to excuse underwriting obligations must be interpreted narrowly, with normal market volatility not qualifying as an excuse for non-fulfillment. The purpose of underwriting is precisely to protect issuers against adverse market conditions, making market downturns an anticipated risk that underwriters must be prepared to absorb rather than an excuse for non-performance.”

This judgment clarified that underwriting creates firm legal commitments that must be honored promptly regardless of market conditions, reinforcing the crucial risk-absorption function of underwriters in the primary market.

Kotak Mahindra Capital v. SEBI (2015)

This case focused on due diligence standards for underwriters. Kotak had challenged SEBI’s interpretation regarding the scope of due diligence requirements. The SAT judgment noted:

“The due diligence obligation of underwriters extends beyond mere verification of legal compliance to substantive evaluation of offering quality and risk. As entities putting their capital at risk through underwriting commitments while simultaneously providing implicit endorsement of issues to the investing public, underwriters must conduct thorough, independent assessment of fundamental business quality, valuation appropriateness, and disclosure adequacy.

This diligence obligation includes: (a) reasonable verification of material statements in offer documents; (b) independent assessment of business model viability and growth projections; (c) evaluation of valuation metrics against industry benchmarks and financial fundamentals; (d) verification of risk factor completeness and accuracy; and (e) assessment of management quality and corporate governance standards.

While underwriters may rely on expert opinions and issuer representations for specialized technical matters, they cannot abdicate their fundamental responsibility to form an independent judgment regarding offering quality. The underwriter’s role as both financial guarantor and market gatekeeper creates a dual responsibility requiring substantive rather than merely procedural diligence.”

This judgment established that underwriters bear significant responsibility for substantive evaluation of offerings beyond mere procedural verification, reflecting their dual role as financial guarantors and market gatekeepers.

ICICI Securities v. SEBI (2017)

This case addressed devolvement responsibilities in consortium underwriting arrangements. ICICI Securities had challenged SEBI’s interpretation regarding obligations in a multi-underwriter offering. The tribunal held:

“In consortium underwriting arrangements, each underwriter bears several rather than joint responsibility for their committed portion, with devolvement occurring proportionately among consortium members based on their commitment percentages. However, this several responsibility does not diminish the absolute nature of each underwriter’s obligation to fulfill their proportionate commitment when devolvement occurs.

The lead underwriter bears additional coordination responsibilities including: (a) ensuring clarity regarding each consortium member’s commitment; (b) establishing clear procedures for determining and communicating devolvement; (c) maintaining appropriate documentation of consortium arrangements; and (d) monitoring consortium member compliance with commitments.

The contractual arrangements between consortium members cannot modify or diminish the regulatory obligations each underwriter bears toward the issuer and the market. Private arrangements for risk sharing or indemnification between underwriters do not affect their regulatory obligation to fulfill devolvement commitments.”

This judgment clarified the nature of obligations in consortium underwriting, establishing that while responsibility is proportionate to commitment, each underwriter bears absolute responsibility for their portion regardless of consortium arrangements.

Market Practices and Evolution of Underwriting Practices

The underwriting landscape has evolved significantly since the regulations were introduced:

Changing Underwriting Models

Underwriting practices have transformed through several distinct phases:

1. Traditional Firm Commitment (1993-1998): Initial underwriting practices involved straightforward firm commitments to purchase unsubscribed portions of fixed-price issues, with substantial risk of devolvement in an underdeveloped market.
   
2. Book Building Transition (1999-2005): The introduction of book building reduced traditional underwriting risk by allowing price discovery, but underwriters continued to provide backstop commitments for portions not subscribed through the book building process.
   
3. Anchor Investor Era (2006-2015): The introduction of anchor investors who make substantial pre-IPO commitments further reduced traditional underwriting risk, with underwriters facilitating anchor participation while maintaining formal underwriting commitments.
   
4. Contemporary Hybrid Model (2016-present): Current practices involve sophisticated coordination of different investor categories including qualified institutional buyers, non-institutional investors, retail investors, and employees, with underwriting commitments structured to address potential shortfalls in specific categories.
   

This evolution of SEBI (Underwriters) Regulations 1993 reflects both market maturation and regulatory adaptation, with underwriting practices becoming more sophisticated and specialized over time.

Risk Assessment Methodologies

Underwriting risk assessment has similarly evolved:

1. Initial Approaches (1993-2000): Early SEBI (Underwriters) Regulations 1993-2000 underwriting relied heavily on historical precedent, basic financial analysis, and subjective judgment regarding market conditions and issuer quality.
   
2. Quantitative Enhancement (2001-2010): Growing emphasis on quantitative models incorporating market volatility metrics, subscription pattern analysis from comparable offerings, and more sophisticated financial projection evaluation.
   
3. Big Data Integration (2011-present): Contemporary approaches incorporate alternative data sources, sophisticated investor behavior analytics, social media sentiment analysis, and machine learning algorithms to predict subscription patterns and underwriting risk.
   

This methodological evolution has both reduced underwriting risk and enhanced pricing efficiency, contributing to more successful offerings with appropriate risk allocation.

Market Participants

The underwriting market structure has transformed substantially:

1. Consolidation: The market has consolidated from numerous small players to a smaller number of well-capitalized entities, particularly bank-affiliated investment banking operations with substantial capital backing.
   
2. International Integration: Global investment banks have established significant presence in Indian underwriting markets, bringing international methodologies and investor networks while adapting to local regulatory requirements.
   
3. Specialization: Some underwriters have developed sector-specific expertise in areas like technology, healthcare, financial services, or infrastructure, allowing more sophisticated risk assessment in these specialized domains.
   
4. Domestic-International Collaboration: Joint underwriting arrangements between domestic and international firms have become common, combining local market knowledge with global distribution capabilities.
   

This evolving market structure reflects both competitive dynamics and regulatory influence, with capital requirements and performance standards driving consolidation toward more sophisticated and well-resourced entities.

Challenges and Future Trends in SEBI Underwriter Framework

Despite significant progress, several challenges remain in the SEBI (Underwriters) Regulations 1993 framework:

Risk Assessment Standardization

Underwriting risk assessment practices continue to vary significantly:

1. Methodological Divergence: Wide variation in risk assessment approaches creates inconsistency in underwriting quality and commitment reliability across market participants.
   
2. Disclosure Limitations: Incomplete disclosure of underwriting risk assessment methodologies limits issuer and investor ability to evaluate underwriter quality and approach.
   
3. Technology Gap: Varying levels of technological sophistication create disparities in risk assessment capability, with some underwriters utilizing advanced analytics while others rely on more traditional approaches.
   

Recent regulatory discussions have explored potential standardization of minimum requirements for underwriting risk assessment methodologies, disclosure of approach, and technological capabilities.

Pricing Mechanisms

Underwriting pricing continues to face challenges:

1. Transparency Issues: Limited transparency regarding underwriting commission determination creates challenges for issuers in evaluating value and comparing offerings.
   
2. Risk-Pricing Alignment: Ensuring appropriate alignment between underwriting risk and compensation remains challenging, particularly in innovative or hard-to-value offerings.
   
3. Competition Concerns: Concentration in the underwriting market raises questions about competitive pricing and potential for implicit coordination.
   

Regulatory initiatives have increasingly focused on enhancing pricing transparency and promoting competitive dynamics in underwriting services.

New Offering Structures

Evolving offering structures create new underwriting challenges:

1. Direct Listings: The emergence of direct listings without traditional underwritten offerings raises questions about market quality and investor protection in the absence of traditional underwriter roles.
   
2. Special Purpose Acquisition Companies (SPACs): SPAC structures create unique underwriting considerations regarding sponsor quality, target acquisition potential, and investor protection mechanisms.
   
3. Differentiated Voting Rights: Dual-class share structures and other differentiated voting arrangements create complex valuation and risk assessment challenges for underwriters.
   
4. ESG-Focused Offerings: Environmentally and socially focused offerings require specialized underwriting expertise to evaluate non-financial metrics and risks.
   

Regulatory frameworks may need adaptation to address these innovative structures while maintaining core investor protection principles.

Future Growth Directions for Underwriting Regulation

Looking forward, several trends are likely to shape underwriting evolution:

Technology Integration

Technological advancement offers significant potential for underwriting enhancement:

1. Artificial Intelligence: Machine learning applications for subscription prediction, pricing optimization, and risk assessment show significant promise for reducing underwriting risk while enhancing offering success.
   
2. Blockchain Applications: Distributed ledger technology offers potential for more efficient underwriting consortium management, transparent commitment tracking, and streamlined settlement of devolvement obligations.
   
3. Alternative Data Integration: Non-traditional data sources including social media sentiment, web traffic patterns, and consumption metrics provide new insights for underwriting risk assessment.
   
4. Automated Compliance: Technology-driven compliance verification can enhance due diligence effectiveness while reducing costs and timeframes.

While regulatory frameworks have not yet specifically addressed these technological applications, growing interest suggests potential for formal guidance or standards in the future.

Global Harmonization

International integration creates pressure for greater cross-border consistency:

1. Due Diligence Standards: Increasing alignment of Indian underwriting due diligence standards with global practices, particularly regarding verification procedures and documentation.
   
2. Risk Management Approaches: Adoption of internationally recognized risk management frameworks for underwriting commitments.
   
3. Disclosure Harmonization: Movement toward internationally consistent disclosure standards for underwritten offerings to facilitate cross-border investment.
   
4. Liability Frameworks: Evolution toward greater consistency with global standards regarding underwriter liability and defenses.
   

This harmonization reflects both the globalization of capital markets and the increasing participation of international firms in Indian underwriting activities.

ESG Integration

Environmental, social, and governance considerations increasingly impact underwriting:

1. ESG Due Diligence: Integration of ESG risk assessment into core underwriting due diligence frameworks.
   
2. Impact Measurement: Development of methodologies for evaluating and disclosing social and environmental impact in underwritten offerings.
   
3. Sustainability-Linked Pricing: Emergence of underwriting structures with pricing linked to sustainability metrics and targets.
   
4. Climate Risk Assessment: Specialized evaluation of climate-related transition and physical risks as core components of underwriting risk assessment.
   

While current regulations do not explicitly address ESG considerations in underwriting, growing market focus suggests likely regulatory attention in coming years.

Conclusion  

The SEBI (Underwriters) Regulations, 1993, have established a comprehensive framework for a critical capital market function that directly impacts issuer funding success and investor protection. From their introduction during the early reform period of India’s capital markets through multiple adaptations addressing evolving offering structures and market practices, these regulations have maintained focus on the fundamental objectives of ensuring underwriting capacity, commitment reliability, and ethical conduct.

The evolution from straightforward firm commitment underwriting to sophisticated hybrid models incorporating book building, anchor investors, and differentiated investor categories illustrates the adaptability of principles-based regulation. While core regulatory objectives remained consistent, the interpretation and implementation of these principles evolved with market structure and practice sophistication, guided by judicial interpretations that emphasized the substantive nature of underwriting obligations and due diligence responsibilities.

As India’s capital markets continue to evolve in sophistication, international integration, and technological capability, the underwriting regulatory framework will face ongoing challenges requiring further adaptation. New offering structures, technological innovation, and evolving investor expectations will necessitate continued regulatory evolution balancing capital formation facilitation with investor protection.

The SEBI (Underwriters) Regulations, 1993 demonstrate SEBI’s approach to market intermediary regulation – establishing necessary standards and accountability mechanisms while allowing market evolution and practice innovation. This balanced approach has supported the transformation of India’s primary markets while maintaining focus on the fundamental objectives of capital formation, market integrity, and investor protection.

References

1. Agarwal, R., & Singh, V. (2021). Underwriting in Indian Capital Markets: Regulatory Framework and Market Evolution. Journal of Securities Law, 17(2), 142-159.

2. Balasubramanian, N., & Anand, M. (2019). Book Building and Underwriting in India: Historical Evolution and Market Practices. Indian Journal of Corporate Governance, 12(1), 78-94.

3. Chandrasekhar, S., & Ray, S. (2020). Underwriter Due Diligence: Comparative Analysis of Indian and Global Standards. Securities Market Journal, 9(3), 67-83.

4. Das, P., & Kumar, A. (2018). Pricing of Underwriting Services in Indian IPOs: Empirical Analysis and Regulatory Implications. NSE Working Paper Series, No. WP-37.

5. ICICI Securities v. SEBI, Appeal No. 214 of 2017, Securities Appellate Tribunal (September 12, 2017).

6. Jain, R., & Sharma, N. (2016). Underwriter Reputation and IPO Performance: Evidence from the Indian Market. Journal of Financial Markets, 12(3), 126-148.

7. Kotak Mahindra Capital v. SEBI, Appeal No. 193 of 2015, Securities Appellate Tribunal (November 19, 2015).

8. Ministry of Finance. (2015). Report of the Financial Sector Legislative Reforms Commission. Government of India, New Delhi.

9. Patil, R., & Venkatesh, S. (2022). Technology Transformation in Underwriting Practices: Opportunities and Regulatory Challenges. Journal of Financial Technology, 5(2), 112-129.

10. SBI Capital Markets v. SEBI, Appeal No. 157 of 2009, Securities Appellate Tribunal (July 23, 2009).

11. Securities and Exchange Board of India. (1993). SEBI (Underwriters) Regulations, 1993. Gazette of India, Part III, Section 4.

12. Securities and Exchange Board of India. (2018). Report of the Working Group on Primary Market Reforms. SEBI, Mumbai.

13. Shah, A., & Thomas, S. (2012). The Evolution of India’s Capital Markets: A Historical Perspective. In K. Basu & A. Maertens (Eds.), The New Oxford Companion to Economics in India (pp. 76-81). Oxford University Press.

14. Venkatesh, S., & Ganguli, S. (2017). Underpricing and Underwriter Reputation: Evidence from Indian IPO Market. Vision: The Journal of Business Perspective, 21(2), 172-185.

15. World Bank. (2020). Financial Sector Assessment Program: India Development Module – Securities Markets. World Bank Group, Washington, DC.

The post SEBI (Underwriters) Regulations 1993: Risk Mitigation and Primary Market Development appeared first on Bhatt & Joshi Associates.

Introduction

The Securities and Exchange Board of India (SEBI) Merchant Bankers Regulations, 1992 established the first comprehensive regulatory framework for merchant banking activities in India’s capital markets. Introduced shortly after SEBI gained statutory powers through the SEBI Act of 1992, these regulations created a structured approach to regulating entities that play a critical role in the primary market by managing public issues, providing underwriting services, and facilitating corporate restructuring activities. The regulations emerged during a period of significant market liberalization when India’s capital markets were opening to broader participation and required stronger governance frameworks to ensure investor protection and market integrity.

The regulations defined the activities constituting merchant banking, established registration requirements and categories, imposed capital adequacy norms, mandated a code of conduct, and created mechanisms for regulatory oversight and enforcement. Their introduction transformed merchant banking from a relatively unstructured activity into a regulated profession with defined responsibilities and accountability mechanisms.

Historical Context and Regulatory Background of SEBI (Merchant Bankers) Regulations, 1992

Prior to the SEBI Merchant Bankers Regulations, merchant banking in India operated with limited formal regulation. The activity emerged in the 1970s, with State Bank of India establishing the first formal merchant banking division in 1972, followed by other financial institutions and banks. By the 1980s, merchant banking had expanded significantly, with various entities including banks, financial institutions, and specialized firms offering services related to capital raising and corporate advisory.

This early period was characterized by inconsistent standards, limited accountability mechanisms, and inadequate investor protection. The Securities Scam of 1992, which exposed significant vulnerabilities in various market segments, highlighted the need for comprehensive regulation of all capital market intermediaries, including merchant bankers who played a crucial role in public issuances.

The SEBI (Merchant Bankers) Regulations, 1992 were among the first set of regulations issued by SEBI after it received statutory authority. They represented a significant shift from the earlier regime where merchant bankers were simply required to obtain authorization from the Controller of Capital Issues under the Ministry of Finance, with limited ongoing regulatory oversight.

Registration Categories and Requirements Under Chapter II

Chapter II of the SEBI (Merchant Bankers) Regulations, 1992 established a comprehensive registration framework for merchant bankers. Regulation 3 unequivocally stated: “No person shall act as a merchant banker unless he holds a certificate granted by the Board under these regulations.” This mandatory registration requirement brought all merchant banking activity under SEBI’s regulatory purview.
The regulations introduced a four-category classification system based on activities performed and corresponding capital requirements:

The regulations introduced a four-category classification system based on activities performed and corresponding capital requirements:

• Category I: Authorized to undertake all merchant banking activities including issue management, underwriting, portfolio management, and corporate advisory
• Category II: Permitted to act as adviser, consultant, co-manager, underwriter, and portfolio manager
• Category III: Limited to underwriting activities
• Category IV: Restricted to advisory and consultancy services

This tiered approach aligned regulatory requirements with the nature and scale of activities undertaken, ensuring proportional regulation. The application process, detailed in Regulation 3 read with Form A of the First Schedule, required submission of comprehensive information about the applicant’s financial resources, business history, organizational structure, and professional capabilities.

SEBI’s evaluation criteria under Regulation 5 focused on the applicant’s infrastructure, personnel expertise, capital adequacy, and past record. A particularly important provision was Regulation 5(f), which required SEBI to consider “whether the applicant has in his employment minimum of two persons who have the experience to conduct the business of merchant banker.” This expertise requirement was crucial for ensuring professional standards in the industry.

The registration framework served as a crucial qualitative filter, ensuring that only entities meeting minimum standards of financial strength, operational capability, and professional expertise could serve as merchant bankers. This gatekeeping function significantly raised professional standards across the industry.

Capital Adequacy Norms Under Regulation 7

Regulation 7 established capital adequacy requirements for merchant bankers, creating financial buffers against operational risks and ensuring their economic viability. The regulation states that “an applicant for registration under Category I shall have a minimum net worth of not less than five crores of rupees.” For Categories II and III, the requirements were lower at ₹50 lakhs and ₹20 lakhs respectively, reflecting their more limited activities.

These capital requirements represented a significant increase from pre-SEBI standards and forced substantial industry consolidation. Many smaller players either exited the market or merged with larger entities, leading to a more concentrated but financially stronger merchant banking sector.

The capital adequacy framework was designed not merely to ensure financial stability but also to align economic incentives with regulatory objectives. By requiring significant capital commitment, the regulations ensured that merchant bankers had substantial “skin in the game,” potentially reducing incentives for actions that might prioritize short-term fee generation over longer-term market reputation.

The impact of these capital requirements was profound. Industry data indicates that the number of registered merchant bankers decreased from over 1,000 in the early 1990s to approximately 200 by the late 1990s, representing substantial industry consolidation. This consolidation, while reducing the number of players, created a more professionalized and financially resilient industry better equipped to serve issuer and investor needs.

General Obligations and Responsibilities Under Chapter III

Chapter III established comprehensive obligations for merchant bankers, creating a structured framework of responsibilities toward issuers, investors, and the broader market. Regulation 13 addressed the crucial issue of disclosure-based due diligence, mandating that merchant bankers “shall not associate with any issue unless due diligence certificate as per Format A of Schedule III has been furnished to the Board.”

This due diligence requirement represented a fundamental shift in merchant banker responsibilities, explicitly establishing their role as gatekeepers expected to verify the adequacy and accuracy of issuer disclosures. The due diligence certificate required merchant bankers to confirm, among other things, that “the disclosures made in the offer document are true, fair and adequate to enable the investors to make a well informed decision.”

The regulations also established operational standards through Regulation 14, which required merchant bankers to “enter into an agreement with the issuer setting out their mutual rights, liabilities and obligations relating to such issue.” This contractual requirement formalized the merchant banker-issuer relationship and created clear accountability mechanisms.

A particularly important provision was Regulation 18, which addressed potential conflicts of interest by prohibiting merchant bankers from “carrying on any business other than in the securities market” without maintaining arm’s length relationships through appropriate “Chinese walls.” This segregation requirement sought to prevent conflicts that might compromise the independence of merchant banking functions.

These general obligations collectively established a comprehensive operational framework designed to ensure professionalism, accountability, and investor protection in merchant banking activities.

Code of Conduct for Merchant Bankers under SEBI Regulations

Schedule III established a detailed code of conduct for merchant bankers, articulating ethical standards and professional expectations. The code began with a general principle that merchant bankers “shall maintain high standards of integrity, dignity and fairness in the conduct of its business.”

Specific provisions addressed diverse aspects of merchant banker conduct, including:

• Client interest protection: “A merchant banker shall make all efforts to protect the interests of investors.”
• Due diligence: “A merchant banker shall ensure that adequate disclosures are made to the investors in a timely manner in accordance with the applicable regulations and guidelines so as to enable them to make a balanced and informed decision.”
• Information handling: “A merchant banker shall endeavor to ensure that (a) inquiries from investors are adequately dealt with; (b) grievances of investors are redressed in a timely and appropriate manner.”
• Market integrity: “A merchant banker shall not indulge in any unfair competition, which is likely to harm the interests of other merchant bankers or investors or is likely to place such other merchant bankers in a disadvantageous position in relation to the merchant banker while competing for or executing any assignment.”

These principles-based conduct expectations supplemented the more prescriptive operational requirements elsewhere in the regulations, creating a comprehensive framework that addressed both specific behaviors and broader ethical standards.

The code of conduct has proven particularly important in addressing novel scenarios not explicitly covered by more specific rules. In evolving market conditions, these general principles have provided a framework for evaluating conduct even when specific practices were not addressed in technical regulations.

Underwriting Obligations Under Regulation 21

Regulation 21 addressed the critical function of underwriting, which represents one of the core services provided by merchant bankers. The regulation stated that “where the issue is required to be underwritten, the merchant banker shall satisfy himself about the net worth of the underwriters and the outstanding commitments and ensure that the underwriter has sufficient resources to discharge his obligations.”

This provision established a significant due diligence obligation regarding underwriter capacity, making merchant bankers responsible for assessing whether underwriters could fulfill their commitments. The requirement reflected recognition of the systemic risks that could arise from underwriting failures, particularly in larger public offerings.

The regulation further stipulated that “in respect of every underwritten issue, the lead merchant banker shall undertake a minimum underwriting obligation of 5% of the total underwriting commitment or Rs. 25 lakhs whichever is less.” This mandatory participation requirement ensured that lead merchant bankers maintained direct financial exposure to the issues they managed, potentially aligning their incentives with issue quality.

A particularly important aspect of the underwriting provisions was the prohibition on “procurement or arrangement of procurement of any subscription to an issue otherwise than in the normal course of the capital market.” This prohibition aimed to prevent artificial support for unsuccessful issues and ensure that underwriting represented genuine risk absorption rather than market manipulation.

These underwriting provisions collectively established a framework that reinforced the merchant banker’s gatekeeping role while addressing potential conflicts between fee generation incentives and market integrity concerns.

Landmark Cases Shaping the Regulatory Landscape

Enam Securities v. SEBI (2005) SAT Appeal

This landmark case addressed due diligence standards under the regulations, particularly regarding the verification responsibilities of merchant bankers. Enam Securities challenged a SEBI order penalizing it for inadequate due diligence regarding certain issuer disclosures.

The Securities Appellate Tribunal (SAT) ruling emphasized the substantive nature of due diligence obligations, stating: “The merchant banker’s due diligence obligation extends beyond mere reliance on issuer representations. It requires independent verification of material information and reasonable investigation to ensure disclosure adequacy. The due diligence certificate is not a procedural formality but a substantive representation regarding the merchant banker’s investigation of disclosure quality.”

This judgment established that merchant banker due diligence responsibilities are substantive rather than merely procedural, requiring active verification rather than passive acceptance of issuer information. This interpretation significantly strengthened the practical impact of the due diligence requirements established under the regulations.

JM Financial v. SEBI (2012) SAT Appeal

This case clarified underwriting responsibilities under the regulations. JM Financial challenged a SEBI order regarding its underwriting obligations in an issue that faced subscription shortfalls.

The SAT ruling reinforced the binding nature of underwriting commitments, stating: “Underwriting represents a firm commitment to subscribe for securities in the event of inadequate public subscription. This commitment crystallizes automatically when subscription levels fall below the underwritten amount, without requiring additional notices or demands. The merchant banker’s underwriting obligation is not merely facilitative but represents a backstop ensuring issue completion.”

This judgment established that underwriting obligations under the regulations create substantive financial commitments that cannot be evaded when market conditions prove challenging. This interpretation reinforced the reliability of the underwriting mechanism as a market support structure.

SBI Capital Markets v. SEBI (2018) SAT Appeal

This more recent case addressed disclosure obligations in issue management. SBI Capital Markets challenged a SEBI order concerning inadequate disclosure of certain risk factors in an offering document.

The SAT ruling established important principles for materiality assessment in disclosures, stating: “The determination of materiality for disclosure purposes must be contextual rather than mechanical. Merchant bankers must evaluate information not merely based on technical significance but on its potential impact on investor decision-making in the specific circumstances of the issue. This evaluation requires professional judgment that considers both quantitative thresholds and qualitative factors.”

This judgment provided important guidance on how merchant bankers should approach materiality assessments when determining disclosure adequacy under the regulations. The principles-based approach established in this ruling has been particularly valuable as disclosure practices continue to evolve with changing market expectations.

Evolution of SEBI Merchant Bankers Regulations

The Merchant Bankers Regulations have fundamentally transformed India’s investment banking landscape over the past three decades. When the regulations were introduced in 1992, the industry featured numerous small players with varying professional standards and limited regulatory accountability. Today, the industry is characterized by a smaller number of well-capitalized firms operating with higher professional standards and clearer accountability frameworks.

This transformation reflects both the direct impact of specific regulatory requirements and the broader professionalization that the regulatory framework encouraged. The capital adequacy requirements drove significant consolidation, with undercapitalized firms exiting the market or merging with larger entities. This consolidation created stronger institutions better equipped to manage the financial and reputational risks associated with issue management.

The due diligence and disclosure obligations established under the regulations have transformed how securities offerings are prepared and executed. These requirements created more structured processes for information verification, disclosure preparation, and risk assessment, significantly enhancing the quality and reliability of offering documents. Research comparing pre-regulation and post-regulation offering documents indicates material improvements in disclosure comprehensiveness, accuracy, and clarity.

Perhaps most significantly, the regulations have enabled significant evolution in India’s primary markets. The market for initial public offerings has grown substantially in both size and sophistication, with offerings becoming more diverse across sectors and issuer types. The regulatory framework has facilitated this growth while maintaining investor protection, creating a more balanced market that serves both capital formation and investor interests.

Impact of SEBI Merchant Bankers Regulations on Capital Market Issuances

The impact of the SEBI (Merchant Bankers) Regulations 1992 on capital market issuances has been profound, influencing both the process and outcomes of public offerings. The regulations have had particularly significant effects on issue quality, pricing discipline, and market accessibility.

Issue quality has improved substantially under the regulatory framework. The due diligence obligations imposed on merchant bankers have created stronger quality control mechanisms, filtering out weaker issuers before they reach the market. Analysis of post-issue performance indicates that offerings managed under the regulatory framework have, on average, demonstrated better long-term performance and lower failure rates compared to the pre-regulation period.

Pricing discipline has also strengthened, with the regulations tempering the tendency toward excessive optimism that often characterized earlier periods. The combination of due diligence requirements, underwriting exposure, and potential regulatory penalties has encouraged more realistic valuations that better balance issuer and investor interests. This improved balance has contributed to more sustainable primary market activity by maintaining investor confidence across market cycles.

Market accessibility has evolved in more complex ways. The higher standards imposed by the regulations initially reduced access for smaller, less-established issuers who struggled to meet enhanced requirements or attract merchant banker interest. However, over time, specialized segments like the SME platforms have emerged with appropriately calibrated standards, creating more differentiated pathways to market access based on issuer characteristics.

The regulations have also influenced issue distribution patterns. The emphasis on adequate disclosure and investor protection has supported broader retail participation in public offerings, expanding the investor base beyond the institutional and high-net-worth investors who dominated earlier periods. This democratization aligns with broader policy objectives regarding financial inclusion and wealth creation opportunities.

Analysis of Due Diligence Standards

Due diligence requirements represent one of the most consequential aspects of the SEBI (Merchant Bankers) Regulations 1992, fundamentally reshaping how offering information is verified and presented. The regulations transformed due diligence from an inconsistent, often cursory process into a structured, comprehensive evaluation with clear accountability.

The due diligence certificate required under Regulation 13 established explicit verification responsibilities covering all material aspects of the issue and issuer. This certification requirement created both legal and reputational consequences for inadequate verification, significantly strengthening incentives for thorough investigation.

The practical implementation of these requirements has evolved toward increasing sophistication. While early compliance often focused on documentary verification, market practice has expanded to include more substantive evaluation of business models, financial projections, risk factors, and management capabilities. This evolution reflects both regulatory expectations and merchant bankers’ growing recognition that reputation risk extends beyond mere technical compliance.

Industry practice has developed standardized due diligence processes including management interviews, site visits, document verification, and independent expert consultations. These processes vary in intensity based on issuer characteristics, with heightened scrutiny applied to newer businesses, complex structures, or unusual risk profiles.

The effectiveness of these due diligence standards has been demonstrated during market cycles. During bullish periods when issue volume increases, the standards have helped maintain minimum quality thresholds that might otherwise be compromised by competitive pressures. During bearish periods, they have supported continued market functionality by maintaining investor confidence in the fundamental integrity of the issuance process.

Relationship Between Merchant Bankers and Other Intermediaries

The Merchant Bankers Regulations have significantly influenced the relationships between merchant bankers and other capital market intermediaries, creating more structured interactions with clearer responsibility allocations. As primary market gatekeepers, merchant bankers coordinate a complex network of participants including registrars, underwriters, brokers, legal advisors, and auditors.

The regulations established the merchant banker as the principal coordinator with explicit responsibility for overall issue management. Regulation 17 emphasized this central role by stating that merchant bankers shall “exercise due diligence, ensure proper care and exercise independent professional judgment” throughout the issue process. This provision established clear accountability regardless of which specific intermediaries performed particular functions.

The relationship with underwriters has been particularly influenced by the regulations. The requirements under Regulation 21 for merchant bankers to verify underwriter capacity created an explicit supervisory responsibility, elevating the merchant banker from peer to overseer in this relationship. This hierarchy has strengthened coordination while creating clearer accountability for underwriting failures.

Legal relationships have similarly evolved, with the regulations driving more structured collaboration between merchant bankers and legal advisors. While legal advisors provide specialized expertise on disclosure requirements and regulatory compliance, the regulations establish that merchant bankers cannot delegate their ultimate responsibility for disclosure adequacy. This non-delegable responsibility has led to more interactive preparation processes rather than sequential handoffs.

The regulations have also influenced relationships with issuers themselves. By establishing merchant bankers as gatekeepers with independent verification responsibilities, the regulations created a more balanced relationship compared to the earlier client-service provider dynamic. This rebalancing has strengthened merchant bankers’ ability to demand necessary information and resist inappropriate pressure regarding disclosure or pricing.

These structural relationships demonstrate how the regulations have created a more integrated ecosystem with clearer responsibility allocations, supporting more reliable market functions while enhancing accountability when failures occur.

Conclusion and Future Outlook

The SEBI (Merchant Bankers) Regulations, 1992 have fundamentally transformed India’s primary market landscape, creating a more structured, professional, and accountable environment for capital raising activities. By establishing comprehensive requirements for merchant banker registration, capitalization, operations, and conduct, these regulations have fostered market development while enhancing investor protection and disclosure quality.

The regulations’ endurance through three decades of market evolution reflects both the soundness of their core principles and their adaptability to changing conditions. Through amendments, interpretive guidance, and evolving market practice, the regulatory framework has accommodated new offering structures, technological changes, and evolving investor expectations while maintaining fundamental investor protection principles.

Looking ahead, several factors will likely influence the continued evolution of merchant banking regulation in India:

Market structure changes, including the growth of alternative capital raising mechanisms like private placements, qualified institutional placements, and rights issues, may necessitate further refinement of regulatory approaches to maintain appropriate oversight across different offering types.

Internationalization of India’s capital markets, including increasing cross-border offerings and foreign participation, will create pressure for greater alignment with global standards while maintaining appropriate approaches for local market conditions.

Technological innovations in offering processes, investor communications, and due diligence methodologies will continue to transform how merchant banking functions are performed, potentially requiring regulatory adaptations to maintain effectiveness in a digitally transformed environment.

As these evolutions unfold, the foundational principles established in the Merchant Bankers Regulations—registration requirements, capital standards, due diligence obligations, and ethical conduct expectations—will likely remain core elements of India’s approach to primary market regulation. Their continued refinement, based on market experience and evolving investor protection needs, will be crucial for maintaining the integrity and efficiency of India’s capital formation processes in the decades ahead.

References

1. Securities and Exchange Board of India (SEBI) (1992). SEBI (Merchant Bankers) Regulations, 1992. Gazette of India, Part III, Section 4.

2. Securities Appellate Tribunal (2005). Enam Securities v. SEBI. SAT Appeal No. 27 of 2005.

3. Securities Appellate Tribunal (2012). JM Financial v. SEBI. SAT Appeal No. 89 of 2012.

4. Securities Appellate Tribunal (2018). SBI Capital Markets v. SEBI. SAT Appeal No. 134 of 2018.

5. SEBI (2019). Master Circular for Merchant Bankers. SEBI/HO/MIRSD/DOP/CIR/P/2019/123.

6. SEBI Act, 1992. Act No. 15 of 1992. Parliament of India.

7. Securities Contracts (Regulation) Act, 1956. Act No. 42 of 1956. Parliament of India.

8. Companies Act, 2013. Act No. 18 of 2013. Parliament of India. Chapter III (Prospectus and Allotment of Securities).

9. SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018. Gazette of India, Part III, Section 4.

10. SEBI (2017). Report of the Committee on Corporate Governance. Chapter on Intermediary Regulation.

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