Mutual Funds Likely To Propose Risk Solutions To SEBI On Pre-IPO Placement Investments

The mutual fund industry of the country is likely to deliberate on risk-mitigating ideas with regards to investing in pre-IPO placements and take them to the market watchdog, Securities and Exchange Board of India, people in the know told NDTV Profit.

As per the industry insiders, the Asset Management Companies are likely to explore ways to manage these risks after the regulator's recent clarification. They are to now look at the likelihood of the IPO of a company to go through, NDTV Profit was told.

One of the options being weighed to tackle this is exploring fixing a legal liability on the concerned companies in whose pre-IPO placements mutual funds invested in but listing could not come through. The Association of Mutual Funds of India is likely to gather suggestions on these lines and take the compilation to the regulator.

SEBI recently stopped mutual funds from investing in pre-IPO placements, sources told NDTV Profit.

The fund houses will only be able to invest in the anchor investor portion or the public issue of an IPO. Anchor allotments take place a day before an IPO opens to the public, whereas pre-IPO placements occur several weeks or months ahead of the listing.

Under existing mutual fund regulations, schemes are allowed to invest in listed and to-be-listed securities. However, since pre-IPO placements happen well before a company’s shares are listed, there has been uncertainty over whether mutual funds could participate in them.

In a communication to the Association of Mutual Funds in India, SEBI explained that allowing mutual funds to invest in pre-IPO placements could expose them to the risk of holding unlisted shares if IPOs are delayed or cancelled.

The market regulator's move "will slow down pre-IPO placements", an investment banker advising on IPOs said.

Pre-IPO rounds often attract fund managers because they are typically priced at a discount to the eventual IPO price, offering potential upside and enhancing scheme performance.

Although mutual fund participation in these rounds has been limited due to regulatory uncertainty, some fund houses had recently begun exploring the option. For instance, SBI Mutual Fund participated in the pre-IPO round of Urban Company.

The SEBI directive to mutual fund houses comes at a time when the IPO market has been buzzing in India, with some big-ticket public issues expected to be launched in the period to come.

Lenskart, ICICI Prudential AMC, Pine Labs, boAt, Groww and Orkla India are some of the key IPOs that primary market investors are eyeing in the near future.