In a surprise development, the Securities and Exchange Board of India (Sebi) has directed mutual fund houses not to invest in pre-initial public offering (IPO) share placements.
In a letter to the Association of Mutual Funds in India (Amfi) it said, “ “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.”
Both Sebi sources and an Amfi official did not comment on the reasons that led to this development. Pre-IPO placements are those in which the company raises money from mutual funds/other investors before it has filed the draft red herring prospectus with the market regulator.
According to sources, Sebi is worried that if the company was unable to go through with the IPO after the placement, the money of retail investors would get stuck. In addition, it also believes that since there are other options like the anchor book, especially meant for such investments, there is no reason for putting money in the unlisted space through such placements.
“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,” Sebi wrote in its letter to Amfi.
Mutual funds have been investing in the pre-IPO market for over two decades now. According to a fund manager, the trend has increased significantly in recent times because of the increase in the number of institutional investors that is resulting in lower allocation in the anchor book.
“A pre-IPO placement ensures that we get a good price/higher placement. So, there is a demand from fund houses to give better returns to investors on listing,” said a CEO of a fund house.
He added that there could be issues if the IPO does not get a clearance from the regulator or is deferred. “But we have checks and balances to ensure that the money comes back to the fund house in such circumstances,” explained the CEO.
Many others in the industry also lamented the fact that an important route to generate alpha for investors has been closed by the regulator.
Another thing this will do is give the foreign portfolio investors (FPIs), domestic family offices, and alternative investment funds (AIFs), an edge over mutual funds. AIFs and FPIs are active in pre-IPO investments, while family offices take exposure in such shares directly and through AIFs.
Earlier last month, the Sebi chief Tuhin Kanta Pandey had informally floated the idea of a regulated platform to buy and sell unlisted shares, a facility available in the financial markets of some developed countries.