Regulatory Acquiescence in Action: SEBI Clarifies Status of IPO Advisors

[Aadi and Nidhi are students at Gujarat National Law University.]

The Securities and Exchange Board of India (SEBI) Order dated 18 September 2025 in the matter of Neomile Corporate Advisory Limited (Order) examined the regulatory ambiguity on whether advisors to companies (in relation to IPOs or issues) need to register as merchant bankers. Prima facie, Section 12(1) of the SEBI Act read with Regulation 2(1)(cb) and 3(2) of the SEBI (Merchant Bankers) Regulations 1992 (MB Regulations) (pre-December amendment) gave rise to the presumption that advisors to issue are merchant bankers. However, relying on the market practice and the principle of regulatory acquiescence, the Order clarified that such advisors do not need to be registered as merchant bankers.

Significantly, this ruling comes at a time when SEBI amended the MB Regulations in December 2025, offering additional clarity. This article will examine both the Order and the December Amendment, examining how they complement each other in reducing regulatory ambiguity for advisory entities in capital markets. The central argument of this article is that the Order represents a principled resolution of the divergence between the text of the MB Regulations which, read literally, would bring advisory entities within the registration requirement, and the entrenched market practice of non-registration for advisory entities that SEBI had knowingly permitted to continue. The December 2025 amendments subsequently gave structural expression to this resolution by removing the very provisions that had been the source of ambiguity.

SEBI’s September Order: Clarification on Advisors’ Status

The Order emanated from an investigation by SEBI into the involvement of Neomile Corporate Advisory Limited (NCAL) in advising issuing companies on SME IPOs. The investigation was triggered by a misleading disclosure on the NCAL’s website, which falsely (albeit by inadvertent error) claimed that it was a SEBI-registered merchant banker.

NCAL’s involvement in the impugned IPOs was advisory in nature. As an advisor, NCAL’s role was to provide strategic guidance and engage with potential investors. However, key functions such as preparing the prospectus, due diligence, and overseeing the final allotment were handled by SEBI-registered merchant bankers.

This case brought to light the regulatory ambiguity regarding whether advisors like NCAL, who provide strategic advice but do not directly engage in issue management or manage the technical aspects of the IPO process, need to be registered as merchant bankers.

Regulatory ambiguity

Section 12(1) of the SEBI Act provides for the mandatory registration of merchant bankers. If an entity acts as an unregistered merchant banker, it shall be construed as a violation of Section 12(1), the non-compliance of which is an offence under Section 24 of the SEBI Act.

The definition of the expression ‘merchant banker’ is not provided under the SEBI Act. The definition of this expression is provided in Regulation 2(1)(cb) of the MB Regulations 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.”

Regulation 3(2)(d) of the MB Regulations (pre-December amendment) provided for advisors and consultants to an issue to be included in the ambit of Merchant Bankers. However, SEBI has not issued Merchant Banker registration to such entities since December 1997 due to the operation of Regulation 3(2A). Furthermore, sub-clause (f) of clause 2.1.1 of the Master Circular for Merchant Bankers dated 26 September 2023 (Master Circular) provides for ‘Advisory Services for Projects’ within the ambit of activities undertaken by a Merchant Banker.

In view of the above, as per Section 12(1) read with Regulation 2(1)(cb) and 3(2) of the MB Regulations read with clause 2.1.1 of the Master Circular, any person who acts as an adviser in relation to an issue could be classified as a Merchant Banker. However, this would be in contrast to the market practice and SEBI policy, where advisors have historically been allowed to operate without the formal registration required for merchant bankers under Section 12(1) of the SEBI Act.

This conflict between the in-practice exemption from registration under the SEBI Act and the requirement of registration arising from Regulations 2(1)(cb) and 3(2) of the MB Regulations gave rise to the regulatory ambiguity within the legal framework.

SEBI’s clarification on advisors’ status

In its Order, SEBI clarified that advisors to IPOs, such as NCAL, are not required to register as merchant bankers unless they are directly involved in issue management. Issue management, as defined by Regulation 2(1)(cb) and Regulation 3(2) inter alia includes the preparation of offer documents, structuring the issue, and final allotment and refund of subscriptions.

Since advisors like NCAL are not responsible for these technical functions, their role is seen as advisory rather than directly engaging in issue management. The Order noted that advisors typically perform strategic and consultative functions, such as helping companies with market engagement, regulatory compliance, and investor outreach, but they do not perform the core issue management tasks that are typically carried out by merchant bankers.

Regulatory Acquiescence and Market Practice

A key element in SEBI’s reasoning was the concept of regulatory acquiescence, which refers to the regulator’s tolerance of market practices that may not otherwise align with regulatory requirements, such as mandatory registration. Relying on the Hon’ble Supreme Court judgement in Chairman, State Bank of India v. MJ James, the Order reasoned that acquiescence negates the right to object if the regulator has allowed a practice to continue without intervention. Regulatory acquiescence operates on the principle that a regulator's prolonged tolerance of a non-compliant practice may estop it from subsequently enforcing the formal requirement against those who relied on that tolerance. This is closely tied to the doctrine of substantive legitimate expectation, which protects market participants who have ordered their conduct on the basis of consistent regulatory inaction. By invoking these doctrines, SEBI has effectively acknowledged that decades of non-enforcement carry legal weight and bind its own future conduct, a position of considerable relevance to other intermediaries operating in similar regulatory gaps.

Further, the longstanding practice of tolerating unregistered advisors created a market expectation that advisors would not need to register. This situation was in line with the principle of substantive legitimate expectation, which ensures that market participants can rely on predictable and consistent regulatory practices, barring arbitrary penalization. The regulatory condonation with respect to the registration requirement for advisors was seen as a form of regulatory acquiescence, where the regulator had, by policy and practice, allowed this practice to continue without undertaking enforcement action.

In the Order, SEBI acknowledged that market practice had evolved in a way that allowed advisors to function without formal registration as merchant bankers. Given this acquiescence and the regulator’s duty to adhere to the doctrine of substantive legitimate expectation, the Order clarified that advisors who do not take on the core functions of issue management are not required to register as merchant bankers.

Recent Amendment and its Impact

The recent December amendment to the MB Regulations marks a significant shift in the manner SEBI categorises and regulates the merchant banking function. 

Under the old framework, Regulation 3(2) of the MB Regulations categorised merchant bankers into four activity-based classes: Category I (full issue management and advisory), Category II (advisory, co-management and underwriting), Category III (underwriting and advisory to an issue), and Category IV (advisory or consultancy to an issue only). Critically, SEBI had discontinued the grant of registrations to Categories II to IV since December 1997, by virtue of Regulation 3(2A), rendering those categories practically defunct.

The amendment introduced a new framework that moved away from the activity-based categorisation of merchant bankers. In doing so, SEBI has removed the standalone recognition earlier accorded to the advisory function under Regulation 3(2). The revised framework now classifies merchant bankers under Regulation 3(4) into Category-I and Category-II, replacing the four-category structure under the old regime. 

Category-I merchant bankers, subject to an enhanced net-worth requirement of at least INR 50 crore, are permitted to undertake the entire spectrum of merchant banking activities, including acting as lead managers to main board public issues. Category-II merchant bankers have a lower net worth requirement of INR 10 crore, and are permitted to carry out all merchant banking activities except those relating to the main board public issue, which are reserved exclusively for Category-I entities.

The Order addressed these four categories of merchant bankers based on the activities performed, and stated the redundancy of Categories II to IV due to discontinued registration. This shift to a two-category framework addresses the suggestion to re-examine the language under Regulation 3(2) and 3(2A) as stated in the Order. By recasting the categorisation of Merchant Bankers based on net worth requirements, this amendment directly responds to the concern of the obsolete four-fold structure. 

The significance of this restructuring lies not merely in the consolidation of categories but in its regulatory consequence: the removal of Categories II to IV eliminates the textual basis upon which an expansive reading of Regulation 2(1)(cb), classifying advisors as merchant bankers, could have found structural support in Regulation 3(2). In this sense, the December amendment does not merely tidy the existing framework; it forecloses the possibility of a regression to the interpretational uncertainty that the Neomile order was called upon to resolve.

Conclusion

The Order and the December amendment together mark a decisive step towards resolving the ambiguity surrounding the registration obligations of advisors. Through the Order, SEBI clarified that entities in purely advisory or consultative roles are not required to register as a Merchant Banker under Section 12(1) of the SEBI Act. This clarification, grounded in regulatory acquiescence and established market practice, provides meaningful relief to advisors who have operated without assuming issue management responsibilities.

The December 2025 amendments reinforce this clarity by addressing the Order’s suggestion to re-examine the Merchant Banking framework. By replacing the four-fold categorisation under Regulation 3 with a two-tier classification, SEBI has addressed the textual inconsistencies created by the presence of Categories II to IV despite their practical redundancy since 1997. However, some ambiguity continues to persist at the definitional level. Regulation 2(1)(cb) still includes advisory and consultative roles within the definition of merchant banker, which, if read literally, may revive interpretational concerns in future cases. Taken together, the Order and the amendment demonstrate an approach that simplifies compliance, aligning regulatory interpretation to market practice. 

More broadly, the Neomile order is also instructive on how SEBI approaches situations where market practice has diverged from the letter of its regulations. Rather than enforcing a requirement that advisors had disregarded for nearly three decades, SEBI used the adjudicatory process to articulate a principled basis for the existing practice, drawing on established administrative law doctrines. The December 2025 amendments then gave that position formal regulatory expression, suggesting that clarification through adjudication followed by legislative consolidation may reflect SEBI's considered approach to resolving such gaps.