The Securities and Exchange Board of India (SEBI) has barred mutual fund schemes from investing in pre-IPO placements of equity shares and related instruments, limiting their participation strictly to anchor investor portions or public issues of Initial Public Offerings (IPOs), according to an exclusive report by Moneycontrol.
The decision, communicated through a letter to the Association of Mutual Funds in India (AMFI), aims to ensure mutual fund schemes remain compliant with regulations mandating investment only in listed or “to be listed” securities.
SEBI reportedly cited Clause 11 of the Seventh Schedule of the SEBI (Mutual Funds) Regulations, 1996, which explicitly states that all mutual fund investments in equity shares or related instruments must be made only in securities that are already listed on recognised stock exchanges or will be listed shortly.
Why SEBI imposed the ban
The clarification came after SEBI received multiple queries from fund houses seeking permission to participate in pre-IPO placements, which typically occur before the opening of anchor or public issues. The regulator expressed concern that allowing such participation could expose mutual fund investors to significant risks if an IPO were delayed or cancelled entirely, Moneycontrol reported.
“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 stated in its letter, as per the report.
“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,” the watchdog organisation added.
Mixed industry reactions
The move has generated divided opinions within India’s Rs 60-lakh-crore mutual fund industry.
Some fund managers view the restriction as a missed opportunity for generating alpha returns—excess returns above market benchmarks—especially since IPOs are often “priced to perfection” by the time they open to the public, with most early gains accruing to private investors and institutional participants who had access to pre-IPO rounds, Moneycontrol cited.
SEBI’s move is more about liquidity and regulatory risk, the report reasoned. Other market players argue that liquidity risks could be managed under the existing disclosure framework that has stress tests and risk disclosures in place.
A regulatory official weighed in the decision to Moneycontrol, stating that mutual fund regulations do not explicitly define the term “to be listed”. Allowing pre-IPO investments could expose funds to situations where the expected listing does not materialise. In short, if a scheme holds shares of a company that never lists, it becomes a compliance nightmare.