Sebi proposes merchant banker exemption for small-value debt issues

The Securities and Exchange Board of India (Sebi) on Thursday proposed exempting issuers of small-value debt issues from the requirement to appoint a merchant banker, subject to certain conditions.

The proposal follows an examination of the recommendations of a Working Group and takes into account the availability of sufficient information about issuers in the public domain, as well as their regulatory oversight.

Under the proposal, the exemption would be available only if the issuer meets specific eligibility criteria.

Sebi has invited public comments on the proposals until September 17, 2026.

First, the issuer must be registered with or regulated by a financial sector regulator in India. Sebi said financial sector regulators provide comprehensive on-site and off-site supervision of regulated entities, while existing regulatory frameworks offer investor protection mechanisms.

Second, the issuer must have been listed on any segment of a recognised stock exchange for at least one year. At the time of granting in-principle approval, stock exchanges would also be required to ensure that there are no pending fines or penalties imposed by Sebi or the exchanges for non-compliance with applicable provisions of the Sebi (Listing Obligations and Disclosure Requirements) Regulations, 2015.

According to Sebi, listed issuers are already subject to the LODR framework, which provides for corporate governance requirements, continuous disclosures and regulatory scrutiny. This, it said, could reduce the need for additional merchant banker oversight in private placements.

The third condition relates to the issuer’s repayment track record. The issuer must not have defaulted during the last three financial years or the current financial year on repayment of deposits or interest, redemption of non-convertible preference shares or debt securities and related interest, payment of dividends to shareholders, or repayment of term loans and related interest.

The issuer would be required to submit an auditor’s certificate confirming compliance with this condition to the stock exchange. Sebi said the requirement is intended to limit the exemption to issuers with a demonstrated ability to service their debt obligations on time.

The fourth condition concerns the nature and rating of the debt security. The security must be unsubordinated or senior and secured by a first or pari passu charge on identifiable assets of the issuer. It must also carry a credit rating of at least AA- on the date of the private placement.

Sebi said this condition would limit the exemption to relatively low-risk instruments, particularly in terms of investors’ claims on assets and cash flows in the event of bankruptcy or liquidation, as well as the probability of default.