The Securities and Exchange Board of India (SEBI) has clarified that mutual funds are not permitted to invest in pre-IPO share placements. In a letter
addressed to the Association of Mutual Funds in India (AMFI), reviewed by The Economic Times, the regulator instructed asset managers to participate only in the anchor investor portion or the public issue of an IPO. Citing Clause 11 of the Seventh Schedule of the SEBI (Mutual Funds) Regulations, 1996, SEBI noted: "All investments by mutual fund schemes in equity shares and equity-related instruments must be made only in securities that are listed or to be listed." What Is A Pre-IPO Placement? A pre-IPO placement refers to the private sale of substantial share blocks before a company goes public. This approach allows emerging companies to raise capital and reduce the uncertainties of their market debut. Typically, these shares are purchased by institutional investors such as private equity firms and hedge funds, often at a discounted price to compensate for the associated risks. Pre-IPO placements are generally limited to high-net-worth individuals and may include lock-up periods that restrict immediate selling, helping to stabilise the stock’s performance once it is listed. Reason Behind The Directive The clarification comes after SEBI received multiple queries regarding mutual funds’ participation in pre-IPO placements before the opening of the anchor or public issue. The regulator warned that investing in pre-IPO placements could leave mutual funds holding unlisted shares in the event of a delay or cancellation of the IPO. By limiting mutual fund participation to the anchor or public portions, SEBI aims to protect investors and ensure that mutual fund schemes only hold securities that are publicly listed or expected to be listed. Steps For Asset Management Companies SEBI has asked AMFI to immediately communicate this instruction to all asset management companies (AMCs) and ensure strict compliance across the industry. Mutual fund investors and asset managers must follow this directive to avoid regulatory risks and maintain transparency in equity investments, states the ET report. This move highlights SEBI’s efforts to safeguard investor interests and maintaining orderly capital markets, ensuring that mutual funds invest in instruments aligned with their regulatory mandate.
