Investment banking regulations in India were placed in a very different market context. The merchant banker of the 1990s was closer to a balance sheet insurer, absorbing risks in relatively shallow capital markets. In contrast, today’s investment banker operates more like a transaction architect, where judgment, execution and credibility are far more important than deployable capital.Currently, 238 registered investment bankers operate in a much more institutionalized ecosystem. Their role has evolved to include advisory activities throughout the transaction lifecycle, which includes initial public offerings, pre-IPO and private capital raisings, mergers and acquisitions, buybacks, delistings and other complex capital market transactions.
While SEBI has tried to introduce some flexibility compared to the original proposals, the broader concerns remain largely unaddressed. I am baffled by the rationale for these changes, especially at a time when the country is moving toward a more lenient regulatory regime. Furthermore, there have been no major market disruptions, failures or systemic risks that warrant such significant regulatory intervention.
In addition to a number of operational challenges, two substantive issues deserve serious reconsideration. The most consequential change is the sharp increase in net worth and liquid assets requirements, coupled with minimum income thresholds. These requirements have their roots in the hard underwriting era of 1992, when liquid assets directly supported market risk. While it may be reasonable to revisit asset standards after more than thirty years, it is important to recognize that the underlying context is fundamentally different today. The role of the investment banker has shifted from that of hard underwriter to one that focuses on judgment regarding execution, pricing and structuring, which does not require balance sheet capital.
High capital thresholds therefore do not necessarily translate into proportionally higher investor protection. Instead, they risk concentrating operations in the hands of a few large entities. Just as liquidity in financial markets depends on multiple buyers and sellers, the depth of advisory markets depends on a broad base of credible intermediaries rather than a handful of dominant players. Merchant banking is inherently a service business and not a risk-driven business. The complexity of an IPO, a merger and acquisition transaction or a restructuring does not depend on the net worth of the intermediary. Differentiation based on expertise, track record and quality of implementation would therefore be much more appropriate. Likewise, the introduction of minimum income requirements could deter high-caliber professionals from coming together to build investment banking businesses. At a time when the market should be encouraging more well-trained and highly experienced professionals to enter the sector, these changes risk achieving exactly the opposite outcome.
Closely linked to this is the introduction of a new categorization framework for investment bankers. Categorization can work well in segments where it reflects real differences in risk profiles, such as alternative investment funds or credit institutions. In investment banking, however, such differences are much less clear.
The second major concern relates to the mandatory separation of investment banking activities. According to the circular, investment bankers are required to demerge all non-SEBI regulated activities into separate business units within six months, with identification of such activities to be taken immediately and disclosed on their websites.
In practice, an investment banker is expected to provide a wide range of capital market related services including mergers and acquisitions, private and public capital raising, REITs, InvITs, corporate restructurings and advisory services to AIFs and other SEBI registered entities. If you were to map these activities across different transaction types and customer categories, it becomes clear that they are highly overlapping and intertwined. In such an environment, the feasibility of separating these activities into separate business units is questionable.
The skills required for effective investment banking, including sector insight, valuation judgment, transaction structuring and regulatory interpretation, are being developed in both listed and unlisted segments. A senior banker advising an unlisted M&A transaction often draws on the same expertise when a transaction goes to the public markets. In practice, transactions in investment banking rarely proceed in straight lines. Listed and unlisted elements are often two sides of the same transaction, rather than separate businesses that can be neatly demarcated.
Consider a common scenario in which a privately held subsidiary of a publicly traded company engages in a strategic sale. Potential buyers could be an AIF, a listed company, an unlisted company or the management itself. The final structure of the transaction may remain uncertain for a significant period of time, sometimes several years. In such circumstances it would be extremely difficult for an advisor to classify the activity into one supervisory category or the other. To add to this complexity, advisors representing different bidders may view and categorize the same transaction in entirely different ways.
SEBI’s intention to professionalise investment banking in an increasingly complex capital market environment is well-founded. However, the current framework threatens to make the big bigger by creating capital and revenue moats and enforcing artificial activity silos. A growing economy needs a diverse pool of specialized investment bankers to enable efficient capital allocation, not an oligopolistic market structure.
Given the growth and increasing sophistication of India’s capital markets, the goal should be to encourage more high-quality investment bankers, rather than introducing inherently restrictive measures.
In my view, a more balanced regulatory approach would have focused on regulation at the entity level, supported by stronger disclosure, inspection and enforcement mechanisms, rather than prescribing rigid structural separations and higher capital thresholds. Robust governance standards, effective Chinese walls and clear accountability frameworks can adequately address conflicts of interest without diluting the expertise that underpins effective investment banking.
While it may be late in the process, I sincerely urge a thorough review of these changes.
(Disclaimer: Recommendations, suggestions, views and opinions expressed by experts are their own. These do not represent the views of the Economic Times.)
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