SEBI bans MFs from pre-IPO placements of equity shares

SEBI bans MFs from pre-IPO placements of equity shares

It has cautioned on risks of holding unlisted shares if listing fails

The Securities and Exchange Board of India (Sebi) has restricted mutual funds (MFs) from participating in pre-IPO placements of equity shares. It clarified that MFs can invest in unlisted shares only as anchor investors ahead of an IPO.

(An anchor allotment takes place a day before an IPO opens to the public, while pre-IPO placements are made in the months leading up to the listing).

MF regulations state that MFs can invest in listed and to-be-listed shares. But as the regulations do not mention pre-IPO placements, and the allotments occur before listing, there was ambiguity over whether MFs could participate.

However, now SEBI has communicated to the Association of Mutual Funds in India (AMFI), clarifying that allowing MFs to take part in pre-IPO placements is risky, as it could lead to MF schemes ending up holding unlisted shares.

Even though pre-IPO placements take place after filing the offer document, IPOs can face delays or even cancellation. In such a scenario, investors may end up holding unlisted shares indefinitely, which is not allowed for MFs.

SEBI letter to the AMFI stated, “If the schemes of MFs 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.”

For fund managers, pre-IPO rounds are lucrative, as they generally happen at a discounted price compared to IPOs. Such investments often help boost the scheme’s performance.

While MF participation in pre-IPO rounds has been limited due to regulatory ambiguity, some fund managers are exploring the option.

Recently, SBI MF participated in the pre-IPO round of Urban Company.

Meanwhile, the restriction has come at a time when pre-IPO placements are declining. The move could create an opportunity for other pooled investment vehicles, such as alternative investment funds (AIFs) and family offices, to capture a larger share of the deals.

Thirteen firms raised a record Rs.1,074 crore through pre-IPO placements in 2023. This dropped to eight firms raising Rs.387 crore in 2024. So far this year, seven firms have raised Rs.506 crore.

The decline in the number and value of the deals over the past years is attributed to the narrowing valuation gap between pre-IPO and IPO prices.