Order In The Markets: SEBI’s Regulatory Reset Of Early 2026

Introduction

Between January and April 2026, the Securities and Exchange Board of India (“SEBI”) pushed through a dense cluster of circulars and regulatory amendments – touching everything from merchant banker registration to the way retail investors receive an abridged prospectus. Some of these changes were long overdue; others were triggered by market stress. All of them, taken together, amount to a fairly significant recalibration of how India’s capital markets participants will need to conduct themselves going forward. This article takes stock of the key circulars and amendments to the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015 (“SEBI LODR Regulations”) and the Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2018 (“SEBI ICDR Regulations”), and offers our assessment of the direction these changes point towards.

I. Circulars

Re-Categorisation of Merchant Bankers

SEBI, vide its circular dated January 02, 2026¹, has operationalised the amendments to the Securities and Exchange Board of India (Merchant Bankers) Regulations, 1992 that were notified on December 05, 2025². The single-class registration system has been scrapped. In its place, there is now a two-tier structure:

• Category I merchant bankers can carry out all permitted activities³; and
• Category II merchant bankers can carry out all permitted activities, barring the public issuance of equity shares proposed to be listed on the main board of a recognised stock exchange.

Capital adequacy and liquid net worth requirements will be phased in across 2027 and 2028, as set out below:

There is also a minimum revenue threshold: Rs. 25 crores for Category I merchant bankers and Rs. 5 crores for Category II merchant bankers, calculated on a cumulative basis over the three preceding financial years. Perhaps the most significant operational change is the ring-fencing obligation as merchant bankers must now separate their core merchant banking business from any other regulated activity they may be carrying on (which can be broking, advisory, and the like). The deadline for compliance with these revised requirements is July 03, 2026.

Proportionate Compliance for Stock Brokers

A circular dated January 09, 2026⁴ has overhauled the framework governing how stock brokers report and are penalised for technical failures in their trading systems. The old framework drew no real distinction between a broker with a handful of clients and one with tens of thousands – an obvious problem.

The key changes are twofold:

• Brokers with fewer than 10,000 active clients – which, according to SEBI, is roughly 60% of all registered stock brokers – are now exempt from certain mandatory glitch reporting obligations⁵.
• The penalty structure now differentiates between (i) glitches attributable to the broker’s own systems or negligence, which continue to attract penalties; and (ii) glitches caused by external factors outside the broker’s control – exchange infrastructure failures, third-party technology outages, force majeure events – which no longer carry penal consequences.

The logic is straightforward: glitch regulations exist to protect market integrity, not to punish brokers for system failures they had no hand in causing. SEBI has now codified that distinction.

 Special Dematerialisation Window for Legacy Physical Securities

February 5, 2026 to February 4, 2027 for investors to transfer and dematerialise physical securities which were acquired by the respective shareholders prior to April 1, 2019. The structure for the applicability of this circular is as follows:

The context here is important. When SEBI had earlier restricted physical transfers, it inadvertently stranded a class of investors who held legacy paper shares but could not get them into the dematerialised system – often because of earlier RTA rejections, missing documentation, or simple administrative backlogs. This window gives those investors a defined, time-bound route to regularise their holdings.

Elimination of the Letter of Confirmation

By a separate circular also dated January 30, 2026⁶, SEBI has done away with the Letter of Confirmation (“LOC”) requirement. The LOC was a procedural step that had to be completed before an RTA or listed company could credit transferred securities into an investor’s demat account. In practice, this one intermediate step had pushed the end-to-end transfer process to around 150 days in many cases. For a market that has otherwise gone almost entirely digital, that kind of timeline was hard to justify.

Pledge Mechanism: Mandatory Prior Notice Before Invocation

A circular dated February 5, 2026 has tightened the rules around pledge invocation under the depository system⁷. Going forward, a pledgee must give the borrower reasonable prior written notice before invoking a pledge and disposing of the pledged securities. This brings the depository-level process in line with Sections 176 and 177 of the Indian Contract Act, 1872, which have always contemplated notice requirements and conditions for the sale of pledged goods. In practical terms, what SEBI has done is close a gap: while the statutory framework already required notice, the depository system had no mechanism to enforce it.

Social Media Disclosure Mandate

By a circular dated February 26, 2026⁸, SEBI has directed all registered intermediaries under Section 12 of the SEBI Act, 1992 to display their registered name and registration number on the home page of every social media platform they use. Intermediaries with a single registration must display their details directly; those with multiple registrations must provide a weblink to their website listing all their SEBI registrations. The requirement extends to every piece of content or video they upload. This is part of SEBI’s ongoing effort to crack down on unregistered “finfluencers” – the circular makes it harder for unregistered persons to masquerade as regulated entities on social media.

IPO Observation Letter Extension

Given the ongoing geopolitical tensions in West Asia and the resulting market volatility, SEBI, vide its circular dated April 07, 2026⁹, has extended the validity of all observation letters that were set to expire between April 01, 2026 and September 30, 2026. All such observation letters now stand valid until September 30, 2026. This is a practical measure – a number of IPO-bound companies were facing the prospect of their observation letters lapsing during a period when market conditions made launches unviable.

Minimum Public Shareholding relaxation

Separately, SEBI has also suspended all penal consequences for non-compliance with the 25% minimum public shareholding requirement under the SEBI LODR Regulations, for the period between April 1, 2026 and September 30, 2026¹⁰. This too appears to be a direct response to market conditions – listed entities cannot be reasonably expected to dilute or offload holdings in a stressed market environment.

Lock-In and Pledge Co-existence mechanism

Under Regulation 16 of the SEBI ICDR Regulations, promoter shares in an IPO-bound company are subject to lock-in for a prescribed period. Regulation 15 separately requires that shares be free from any encumbrance, including pledge, at the time of listing. The problem arose where promoters had pledged their shares prior to or during the IPO process – the depository system simply had no way to reflect both a lock-in and a pledge lien simultaneously. SEBI’s circular dated April 8, 2026¹¹ solves this by introducing a “non-transferable” marking mechanism that allows the two restrictions to coexist within the depository system.

NISM Certification for Social Impact Assessors

SEBI introduced the Social Stock Exchange (“SSE”) regime under the SEBI ICDR Regulations in 2022, which among other things requires a Social Impact Assessor (“Assessor”) to evaluate the track record of entities seeking to list on the SSE. Vide its circular dated April 13, 2026¹², SEBI has now mandated that every such Assessor must be certified under the “NISM Series XXIII – Social Impact Assessors Certification Examination” conducted by the National Institute of Securities Markets. The intent is clear enough: if the SSE is to be taken seriously by impact investors, the persons assessing social impact must meet a credible, verifiable professional standard.

 II. Regulatory Amendments

1. SEBI LODR Regulations

The SEBI LODR Regulations were amended on January 22, 2026, introducing several changes to listed company compliance¹³. The headline amendment is the recalibration of the High Value Debt Listed Entity (“HVDLE”) framework. The HVDLE governance regime, which was introduced in 2021 for companies with listed non-convertible debt securities above a specified threshold, has seen its threshold raised from Rs. 1,000 crores to Rs. 5,000 crores. The practical effect is a significant reduction in the number of entities caught by the enhanced governance and disclosure obligations that attach to HVDLE status. The remaining HVDLEs will be those with genuinely material debt market presence.

The amendment also formalises the policy direction from the January 30, 2026¹⁴ circulars by mandating that all credits and transfers of securities by listed companies be effected exclusively in dematerialised form. Taken together, these amendments reflect a broader tightening of compliance expectations for listed entities – SEBI is raising the bar on governance while simultaneously streamlining requirements that no longer serve their original purpose.

2. SEBI ICDR Regulations

The SEBI ICDR Regulations were amended vide notification dated March 16, 2026 (effective March 21, 2026)¹⁵. The focus of this amendment is the abridged prospectus – the condensed disclosure document that accompanies application forms in a public offering and is, for many retail investors, the primary document through which they engage with an IPO.

The key change is the introduction of simplified and standardised formats for the abridged prospectus, with a requirement that a draft version be filed alongside the draft red herring prospectus itself. More notably, the amendment does away with the mandatory physical distribution of the abridged prospectus. In its place, issuers are now required to embed QR codes and web links in the application form that direct investors to the full digital version of the document. This is overdue. The physical distribution requirement had long outlived its utility in a market where a significant majority of IPO applications are made online.

Luthra Views: Concluding Observations

If there is one theme that runs through SEBI’s regulatory output this quarter, it is this: compliance obligations ought to be proportionate to the risks they are meant to address. The merchant banker re-categorisation, the MPS and observation letter extensions, the pledge mechanism reform, the demat window – each of these, in its own way, reflects an acknowledgement by the regulator that one-size-fits-all rules have their limits. Where market conditions or the profile of the regulated entity make blanket compliance unreasonable, SEBI has been willing to adjust. That is a welcome shift, and one we hope will become a more permanent feature of SEBI’s regulatory approach.

The investor protection measures deserve separate mention. The abolition of the LOC requirement, which cuts the securities transfer timeline from 150 days to roughly 30 days, is a reform that was overdue by several years. The special demat window addresses a real problem that SEBI’s own earlier restrictions had created – stranding investors in paper holdings they could neither transfer nor convert. And the social media disclosure mandate, whatever its practical enforceability may turn out to be, at least confronts the fact that retail investors are increasingly taking cues from unregistered and often anonymous voices on social media.

None of this, however, is self-executing. The gap between good regulation and effective enforcement has always been SEBI’s biggest institutional challenge. India’s markets are large, diverse, and marked by wide disparities in compliance culture across different classes of participants.

Footnotes

^{1 SEBI | Specification of the consequential requirements with respect to Amendment of Securities and Exchange Board of India (Merchant Bankers) Regulations, 1992}

^{2 SEBI | Securities and Exchange Board of India (Merchant Bankers) (Amendment) Regulations, 2025}

^{3 Regulation 13(A), Securities and Exchange Board of India (Merchant Bankers) Regulations, 1992.}

^{4 SEBI | Review of Framework to address the ‘technical glitches’ in Stock Brokers’ Electronic Trading Systems}

^{5 SEBI | Ease of Compliance Initiative- Review of Framework to address the ‘technical glitches’ in Stock Brokers’ Electronic Trading Systems’}

^{6 SEBI | Ease of Doing Investment – Special Window for Transfer and Dematerialisation of Physical Securities}

^{7 SEBI | Ease of Doing Investment and Ease of Doing Business – Doing away with requirement of issuance of Letter of Confirmation (“LOC”) and to effect direct credit of securities in dematerialisation account of the investor}

^{8  SEBI | Creation/Invocation of pledge of securities through depository system.}

^{9 SEBI | Ease of Doing Investment (EoDI)- Disclosure of registered name and registration number by SEBI regulated entities and their agents on Social Media Platforms (SMPs)}

^{10 SEBI | One-time relaxation with respect to validity of SEBI Observations}

^{11 SEBI | Relaxation from the applicability of SEBI Master Circular for compliance with the provisions of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 on non-compliance with the Minimum Public Shareholding (MPS) requirements}

^{12 SEBI | Ease of doing business - mechanism for lock-in of pledged shares under SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018}

^{13 SEBI | NISM Certification for Social Impact Assessors}

^{14 SEBI | Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) (Amendment) Regulations, 2026}

^{15 SEBI | Ease of Doing Investment – Special Window for Transfer and Dematerialisation of Physical Securities}

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