SEBI Proposes Merchant Banker Exemption for Small-Value Debt Private Placements by Listed Issuers

The Securities and Exchange Board of India (SEBI) has issued a consultation paper dated August 27, 2026, proposing to exempt certain eligible listed issuers from the mandatory requirement to appoint a merchant banker when raising debt through private placement. The exemption would apply to debt securities and non-convertible redeemable preference shares issued at a face value of Rs 10,000, subject to four eligibility conditions. Public comments on the proposal are invited until September 17, 2026.

Background: The Merchant Banker Requirement

Under the existing regulatory framework, every private placement of debt securities by a listed entity requires the appointment of a merchant banker registered with SEBI. The merchant banker performs due diligence on the issuer and the issue, prepares the placement memorandum, and ensures compliance with the SEBI (Issue and Listing of Non-Convertible Securities) Regulations, 2021 (NCS Regulations). This requirement applies regardless of the size of the issue or the creditworthiness of the issuer.

SEBI's consultation paper acknowledges that feedback from market participants has highlighted the disproportionate cost burden associated with mandatory merchant banker appointments, particularly for frequent issuers raising small amounts. For large, well-rated issuers that access the debt market regularly, the merchant banker's role becomes largely procedural, with the due diligence adding limited incremental value beyond what the issuer's own compliance function already performs.

The Four Eligibility Conditions

The proposed exemption is not blanket. An issuer would need to satisfy all four conditions to qualify:

First, the issuer must have no defaults on specified repayment and payment obligations during the last three financial years and the current financial year. This is the most stringent condition, as it requires a clean track record over an extended period.

Second, the debt security must be unsubordinated or senior in the capital structure. Subordinated debt, which ranks below senior debt in a liquidation, is excluded from the exemption. This ensures that only the lowest-risk tranche of debt benefits from the relaxation.

Third, the debt security must be secured by a first charge or pari passu charge on identifiable assets of the issuer. Unsecured debt is excluded, reflecting the additional investor protection provided by asset backing.

Fourth, the debt security must carry a credit rating of at least AA- on the date of private placement. This is a high threshold: AA- indicates a very strong capacity to meet financial obligations, with only a marginal susceptibility to adverse economic conditions.

Rationale and Market Impact

The corporate bond market in India has grown significantly in recent years. According to SEBI data, private placements of debt securities by listed entities exceeded Rs 7 lakh crore in FY 2025-26. For frequent issuers such as large NBFCs, PSUs, and infrastructure companies that raise debt multiple times a year, the cumulative cost of mandatory merchant banker appointments is substantial.

In practice, the proposed exemption would primarily benefit large, well-capitalised issuers with strong credit ratings. The AA- minimum rating requirement effectively limits the exemption to the top tier of the credit spectrum. According to CRISIL data, less than 15% of rated entities in India carry a rating of AA- or above, meaning the exemption would apply to a relatively narrow but high-volume segment of the market.

Legal Framework

The mandatory merchant banker requirement for private placements derives from the SEBI (Issue and Listing of Non-Convertible Securities) Regulations, 2021. Regulation 21 requires every issuer making a private placement to appoint a merchant banker who is responsible for due diligence, preparation of the placement memorandum, and ensuring compliance with the regulations. The proposed exemption would amend this requirement through a circular rather than a regulation amendment, suggesting SEBI intends to use its general circular-issuing power under Section 11(1) of the SEBI Act, 1992.

The Supreme Court in SEBI v. Pan Asia Advisors Ltd., 2015, upheld SEBI's authority to regulate the activities of merchant bankers and intermediaries, holding that SEBI's regulatory framework for intermediaries is designed to protect investors and maintain market integrity. The proposed exemption does not dilute the merchant banker framework but carves out a narrow exception for issuers that meet stringent eligibility criteria.

Potential Concerns

The principal concern with the exemption is the removal of an independent due diligence layer. Merchant bankers serve as a check on the issuer's disclosures and compliance, and their removal, even for high-rated issuers, transfers the entire compliance burden to the issuer's own management. The IL&FS crisis of 2018 demonstrated that even highly rated entities can experience sudden deterioration, and external due diligence provides an additional line of defence.

In practice, however, the four conditions are designed to mitigate this risk. The combination of no defaults, senior secured status, identifiable asset backing, and AA- minimum rating creates a safety net that compensates, at least partially, for the absence of merchant banker due diligence.

Sources and References

• SEBI Consultation Paper on Exemption from Merchant Banker Requirement for Small-Value Debt Private Placements, August 27, 2026

• SEBI (Issue and Listing of Non-Convertible Securities) Regulations, 2021, Regulation 21 (Merchant banker appointment requirement)

• SEBI Act, 1992, Section 11(1) (Regulatory and circular-issuing authority)

• SEBI v. Pan Asia Advisors Ltd., 2015 (SEBI's authority to regulate intermediaries)

• ANI, "SEBI proposes merchant banker exemption for small-value private debt issues by eligible listed issuers," August 28, 2026

Disclaimer: This article is for informational purposes only and does not constitute legal advice. Readers should consult a qualified legal professional for advice specific to their circumstances.