MC EXCLUSIVE SEBI bars mutual funds from investing in Pre-IPO placements

The clarification was issued after receiving several queries on whether mutual funds could participate in pre-IPO placements before the opening of the anchor or public issue.

The Securities and Exchange Board of India (SEBI) has barred mutual fund schemes from participating in pre-IPO placements of equity shares and related instruments, allowing them to invest only in the Anchor Investor portion or the public issue of an Initial Public Offering (IPO).

In a letter to the industry body Association of Mutual Funds in India (AMFI), SEBI cited Clause 11 of the Seventh Schedule of the SEBI (Mutual Funds) Regulations, 1996, which mandates that all investments by mutual fund schemes in equity shares and equity-related instruments must be made only in securities that are listed or to be listed.

The regulator said the clarification was issued after receiving several queries on whether mutual funds could participate in pre-IPO placements before the opening of the anchor or public issue. It warned that allowing such participation could result in mutual funds holding unlisted shares if an IPO were delayed or cancelled—something that would breach regulatory norms.

“If the schemes of the Mutual Funds are allowed to participate in pre-IPO placements, they may end up holding unlisted equity shares in case the issue or listing cannot be concluded for any reason, which would not be in compliance with the said clause,” SEBI said in its letter, accessed by Moneycontrol.

“Therefore, it is hereby clarified that in case of IPOs of equity shares and equity-related instruments, schemes of Mutual Funds can only participate in the Anchor Investor portion or in the public issue,” it added.

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The debate

The move is rattling some mutual funds which look at pre-IPO as a source of alpha in a market where IPOs are priced to perfection and most of the gains are pocketed by private investors. The regulator’s concern seems to regarding liquidity. But this managers argue can be kept under check, with disclosure norms that are already in place in the form of stress test for liquidity.

A regulatory official, speaking on condition of anonymity, said: “In MF regulations, ‘to be listed’ is not defined, and allowing schemes to invest in pre-IPO placements may pose a risk. Imagine a fund manager invests trusting a promoter who promises a listing that later doesn’t happen — how will those unlisted shares be treated in the scheme?”

While the latest move appears to be aimed at strengthening investor protection by preventing mutual funds from taking exposure to unlisted securities and ensuring that all investments remain confined to listed or soon-to-be-listed instruments, it ends up denying them a lucrative opportunity that can be exploited to benefit the most popular investment choice for retail investors, industry insiders argue.

The regulatory official added that the mutual fund industry already has an anchor quota in IPOs, which should be used instead.

Some of the industry insiders called SEBI’s move strange and surprising. “When other well-regulated institutional investors — such as family offices, AIFs, and foreign investors — are allowed to participate in pre-IPO placements, keeping mutual funds out is not ideal. With proper guardrails, it should be permitted,” one person said.

Interestingly, another regulatory source suggested that the decision may have stemmed from issues spotted during recent inspections, prompting SEBI to caution the industry.

SEBI has directed AMFI to immediately communicate this instruction to all Asset Management Companies (AMCs) and ensure compliance.

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