SEBI Restricts Mutual Funds Participation in Pre-IPO Placements

The Securities and Exchange Board of India (SEBI) has restricted mutual fund schemes from investing in pre-IPO placements of equity shares, as per Reuters. 

Mutual funds will now be allowed to invest only in the Anchor Investor portion or the public issue during an Initial Public Offering (IPO).

Clarification to AMFI

SEBI issued the clarification in a letter to the Association of Mutual Funds in India (AMFI). It referred to Clause 11 of the Seventh Schedule of the SEBI (Mutual Funds) Regulations, 1996, which states that mutual fund investments must be made only in listed or “to be listed” securities. Since pre-IPO placements occur before the anchor or public issue opens, they do not fall under the definition of “to be listed.”

Risk of Holding Unlisted Shares

The regulator highlighted that investing in pre-IPO placements could result in mutual funds holding unlisted shares if an IPO is delayed or cancelled. Mutual funds are not permitted to hold such securities. SEBI said this clarification was issued after receiving multiple queries from fund houses seeking approval to participate in pre-IPO rounds.

Decline in Pre-IPO Activity

Pre-IPO placements involve private sales of shares to select investors before a company lists. These are usually offered at discounted prices. Alternative Investment Funds (AIFs), family offices, and foreign investors are currently allowed to invest in these rounds. 

As per the news reports, 13 firms raised ₹1,074 crore through pre-IPO placements in 2023. The figure dropped to ₹387 crore across eight firms in 2024, and 7 firms have raised ₹506 crore so far this year.

Industry Impact

Mutual funds collectively manage ₹75.61 trillion, catering mostly to retail investors. Some fund houses had hoped to participate in pre-IPO placements to improve returns. However, SEBI has directed AMFI to inform all asset management companies to comply with the revised norms.

Read More: SEBI Proposes Standardised KYC Process for New Mutual Fund Folios!

Conclusion

The new clarification limits mutual fund investments to listed or soon-to-be-listed securities, ruling out participation in pre-IPO placements to avoid exposure to unlisted shares.

Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. This does not constitute a personal recommendation/investment advice. It does not aim to influence any individual or entity to make investment decisions. Recipients should conduct their own research and assessments to form an independent opinion about investment decisions. 

Mutual Fund Investments are subject to market risks, read all the related documents carefully before investing.