The Securities and Exchange Board of India (Sebi) has restricted mutual funds (MFs) from participating in pre-IPO placement of equity shares while clarifying that MFs can invest in unlisted shares only as anchor investors ahead of an IPO.
An anchor allotment is made a day before the IPO opens for the public, while pre-IPO placements are made during the months leading up to the listing.
MF regulations state that MFs can invest in listed and to-be-listed shares. While the regulation has no mention of pre-IPO placements, the fact that these allotments occur before listing had created ambiguity over whether mutual funds could participate in them.
In a letter to the Association of Mutual Funds in India (Amfi), Sebi has reasoned that MFs’ participation in pre-IPO placements is risky as it can lead to MF schemes ending up holding unlisted shares.
While pre-IPO placements take place after the filing of the offer document, an IPO can still face delays or even cancellation. In such cases, investors may end up holding unlisted shares for an indefinite period, which mutual funds are not permitted to do.
“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 said in the letter, which Amfi has forwarded to all its members.
The pre-IPO rounds are lucrative for fund managers as they generally happen at a discounted price compared to the IPO. Often, such investments help boost the performance of the schemes.
While MF participation in pre-IPO rounds has been limited due to the regulatory ambiguity, some fund managers were exploring the option. Recently, SBI MF participated in the pre-IPO round of Urban Company.
The restriction on MF participation comes at a time when pre-IPO placements are on a declining trend. The move could also create an opportunity for other pooled investment vehicles, such as alternative investment funds (AIFs) or family offices, to capture a larger share of these placements.
In 2023, 13 firms raised a record Rs 1,074 crore through pre-IPO placements. However, this figure dropped to eight firms raising Rs 387 crore in 2024. Meanwhile, so far this year, seven firms have raised Rs 506 crore.
The decline in both the number and value of these deals over the past years is largely attributed to the narrowing valuation gap between pre-IPO and IPO prices.
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 "Sebi bars MFs from pre-IPO placements, allows only anchor investments")
