Daijiworld Media Network – Mumbai
Mumbai, Oct 25: The Securities and Exchange Board of India (SEBI) has clarified that mutual fund schemes cannot participate in pre-IPO placements of equity shares and related instruments, restricting them to investing only in the Anchor Investor portion or the public issue of an Initial Public Offering (IPO).
In a letter to the 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 mutual fund investments in equity shares and equity-related instruments must be in securities that are listed or to be listed. The regulator issued the clarification following multiple queries about whether mutual funds could invest before the opening of anchor or public IPO portions. SEBI warned that participation in pre-IPO placements could leave mutual funds holding unlisted shares if an IPO were delayed or cancelled, breaching 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 noted in the letter accessed by Moneycontrol.
The move has unsettled some mutual fund managers, who view pre-IPO participation as a source of alpha in a market where IPOs are highly priced and most gains go to private investors. While SEBI’s concern appears focused on liquidity and investor protection, industry insiders argue that existing disclosure norms and liquidity stress tests are sufficient safeguards.
A regulatory official 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?”
SEBI has instructed AMFI to communicate this directive immediately to all Asset Management Companies (AMCs) and ensure compliance. Some industry experts found the move surprising, noting that other well-regulated institutional investors, such as family offices, AIFs, and foreign investors, continue to be allowed in pre-IPO placements.
While the decision may limit potential gains for mutual fund investors, SEBI emphasized the importance of keeping investments confined to listed or soon-to-be-listed instruments to strengthen investor protection.