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Mumbai: In a significant move set to reshape investment strategy within the mutual fund industry, the Securities and Exchange Board of India (SEBI) has directed fund houses to cease participating in pre-IPO placements of equity shares and related instruments.
The market regulator has explicitly clarified that mutual fund schemes can now only invest in the Anchor Investor portion or the main public issue of an Initial Public Offering (IPO).
The directive, communicated to the Association of Mutual Funds in India (AMFI), is rooted in the SEBI (Mutual Funds) Regulations, 1996, which mandates that all equity investments must be in securities that are listed or to be listed.
The Liquidity and Compliance Concern
SEBI’s primary rationale is a matter of investor protection and regulatory compliance.
In its letter, the regulator warned that allowing mutual funds to engage in pre-IPO placements could result in them holding unlisted equity shares if the planned IPO is unexpectedly delayed or cancelled. Holding unlisted securities would constitute a breach of the regulations governing mutual fund investments, which are structured for retail investors and require a high degree of liquidity.
A regulatory official, speaking anonymously, underscored the risk: “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 Pushback and the ‘Alpha’ Debate
The ban has immediately ignited a debate within the mutual fund industry. Fund managers are reportedly “rattled” by the loss of a key investment avenue that they argue is a vital source of ‘alpha’ (above-market returns).
Industry insiders contend that a pre-IPO placement allows them to acquire shares at a price that offers a better value proposition compared to the main IPO, which is often perceived as being “priced to perfection.”
Funds currently utilise the Anchor Investor quota in IPOs, but managers argue that this portion does not offer the same price advantage as a private pre-IPO round. Their worry is that the field for lucrative pre-IPO deals will now be left exclusively open to family offices and Alternative Investment Funds (AIFs), which cater only to rich, high-ticket investors.
Some insiders called the decision “strange and surprising,” suggesting that with proper disclosure and liquidity stress tests already in place, mutual funds—well-regulated institutional investors—should be allowed to participate alongside AIFs and foreign investors.
SEBI has instructed AMFI to ensure all Asset Management Companies (AMCs) immediately comply with the new regulation.
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