In a move that is set to reshape investment strategies, the Securities and Exchange Board of India (SEBI) has barred mutual fund schemes from participating in pre-IPO placements of equity shares and related instruments. Mutual funds can now invest only in the Anchor Investor portion or the public offering of an Initial Public Offering (IPO).
SEBI issued the clarification in a letter to the Association of Mutual Funds in India (AMFI), citing Clause 11 of the Seventh Schedule of the SEBI (Mutual Funds) Regulations, 1996. The clause mandates that mutual funds invest only in securities that are listed or are to be listed.
The regulator clarified that allowing mutual funds to invest in pre-IPO placements could result in them holding unlisted shares if the IPO is delayed or cancelled — a situation that would violate regulatory norms.
“If 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 comply with the said clause,” source Moneycontrol.
Industry Concerns: Lost Opportunity for Alpha
The move has sparked debate within the mutual fund industry, as pre-IPO placements have historically been seen as a source of alpha — especially in a market where IPOs are often priced aggressively, leaving most gains for early private investors.
Some fund managers argue that liquidity risks, the regulator’s primary concern, can be managed through existing disclosure norms and stress tests.
A regulatory official, speaking on condition of anonymity, explained:
“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?”
Industry insiders warn that the restriction could deny mutual funds access to lucrative pre-IPO rounds, leaving high-net-worth investors, family offices, and Alternative Investment Funds (AIFs) with the first-mover advantage.
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Anchor Investor Quota: No Substitute for Pre-IPO Advantage
SEBI’s official guidance highlights that mutual funds already have access to the anchor investor portion in IPOs, which should be utilised. However, fund managers argue that the anchor quota does not offer the pricing advantage that pre-IPO rounds provide.
“When other well-regulated institutional investors — such as family offices, AIFs, and foreign investors — are allowed to participate in pre-IPO placements, keeping mutual funds out is not ideal. With proper guardrails, it should be permitted,” said one industry insider.
Funds fear that being restricted to anchor allocations during IPOs may force them to buy at higher prices, potentially impacting returns for retail investors.
SEBI’s Intent: Strengthening Investor Protection
According to regulatory sources, the move appears aimed at protecting mutual fund investors by preventing exposure to unlisted securities and ensuring all investments remain confined to listed or soon-to-be-listed instruments.
Another SEBI source suggested that the instruction may have been prompted by issues spotted during recent regulatory inspections, leading to a cautionary stance to ensure compliance across all Asset Management Companies (AMCs).
SEBI has directed AMFI to communicate this instruction immediately to all AMCs and ensure strict adherence to the guidelines.
Industry Reaction: Surprising Move
The decision has been described as “strange and surprising” by some market participants, given that other well-regulated institutional investors are allowed pre-IPO participation.
Analysts note that mutual funds often use pre-IPO allocations to enhance portfolio returns while providing retail investors with exposure to high-growth IPOs. The ban is expected to spark debates on its long-term implications for fund performance and investor choice.
“While the regulatory intent is understandable, barring mutual funds entirely from pre-IPO rounds might limit their ability to generate alpha and compete with other institutional players,” said a Mumbai-based fund manager.
How Mutual Funds Will Adjust
Mutual funds are likely to redirect capital to anchor investor allocations and public IPOs, and may seek alternative strategies to maintain portfolio performance.
Market observers expect the decision to influence fund flows into IPOs, potentially shifting some pre-IPO demand to AIFs and family offices, which could enjoy exclusive early access.
Meanwhile, mutual fund schemes will continue to adhere to SEBI’s clarity on listed securities, with compliance checks and reporting mechanisms in place to avoid regulatory breaches.
Conclusion
SEBI’s move to bar mutual funds from pre-IPO placements reinforces its commitment to investor protection but comes at the cost of limiting a profitable investment avenue for fund managers. While mutual funds will now focus on the anchor investor portion and public issue, the restriction may reshape market dynamics in IPO participation, leaving high-ticket investors with exclusive pre-IPO access.
As the industry adapts to the new guidelines, the debate on whether mutual funds should be allowed pre-IPO participation with proper safeguards is expected to intensify in the coming months.
