SEBI Stops Mutual Funds From Investing In Pre-IPO Placements: Sources

The Securities and Exchange Board of India has 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.

This also comes after SEBI released a consultation paper proposing a uniform process for opening mutual fund folios and executing the first investment.

The market regulator aims to ensure that all new folios are fully Know Your Client (KYC) compliant both at the Asset Management Company level and within the KYC Registration Agency system before any investment is allowed.

Under the proposal, investors will be permitted to make their first investment only after the KRA completes KYC verification and marks the folio as compliant. SEBI has also proposed that investors be informed of their KYC status at every stage through their registered email and mobile number.