Pod Insights Finshots Daily SEBI wants mutual funds to stop chasing pre-IPO deals About this episode In today’s episode on 28th October 2025, we try to explain why mutual funds can no longer access the pre-IPO market. If you haven't already, go get your free, personalized insurance advice by clicking here.
Transcript 0:00 Speaker 00 Hello folks, you're tuned in to Finchart's Daily. In today's episode, we try to explain why mutual funds can no longer access the pre-IPO market.
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0:51 Speaker 00 All investments made by mutual fund schemes in equity shares and equity-related instruments must be made only in securities that are listed or to be listed on a recognized stock exchange. That's clause 11 of the 7th Schedule of SEBI Regulations 996. In simple terms, it says mutual funds can invest only in companies that are already listed or soon to be listed. But that tiny phrase "to be listed" left a lot of room for confusion. It never said how soon that should be, in a few weeks, months, or even years. So, mutual funds stretched the meaning and began investing in unlisted companies that might go public someday. This space is what's known as the pre-IPO market, where companies privately sell shares
1:35 Speaker 00 to large institutional investors before the IPO opens. These are in public trades but negotiated placements meant to give companies a capital cushion and investors an early entry. And it's different from the grey market where traders informally buy and sell IPO shares before listing. It wasn't exactly against the rules, sure, but it definitely bent the spirit of them. By doing this, mutual funds got early access to shares, often at preferential prices and a front row seat to the listing day pop. But the SEBI now wants to shut that door, or at least, that's what the latest reports suggest. Last week, SEBI reportedly wrote to Association of Mutual Funds in India, clarifying that mutual funds cannot participate in pre-IPO placements.
2:17 Speaker 00 If they want IPO exposure, they'll have to invest like everyone else, either as anchor investors, that's a day before the IPO opens, or through the public issue itself. And the logic is simple. Mutual funds shouldn't be stuck holding unlisted shares if an IPO gets delayed or scrapped, because that would break two core promises the product is built on. Daily liquidity, that is investors can redeem their money anytime. Transparent pricing, that is every holding in the fund is valued daily using real market data. Unlisted shares offer neither, which means they don't belong in mutual funds. Now, you could read this as a dry compliance note and move on, but it's actually a line in the sand about what India's biggest pool of household savings should be doing.
2:59 Speaker 00 Mutual funds manage over 75 lakh rupees now and when they dabble in private market style deals, the risks scale up too. And in a year when India is gearing up for one of the world's biggest IPO calendars, SEBI's message is clear that public money should stay in public markets and early invitations are for investors who sign up for those risks knowingly. So, what changes now? Well, without pre-IPO access, mutual funds will lose one source of extra returns. But that doesn't mean the hunt for high returns stop. It migrates to alternative investment funds and private equity players that can still freely invest in unlisted securities. So, the risk that was sitting in small doses inside a regulated, disclosure-heavy, retail-friendly system
3:42 Speaker 00 now shifts to a more exclusive, risk-taking vehicle. And that's good for stability, since retail investors' mutual fund values won't swing with hidden event risks. But it also widens the gap between those who can write big checks, like investors in AIFs and PE, and those who can't. Companies planning to go public will feel the stoop. Pre-IPO rounds often doubled up as a rehearsal for valuation. They're awaited as demand anchor narrative and earn a credibility stamp before hitting the market. But now, more of the prize discovery stress shifts to the anchor book where SEBI has made another tweak. It recently expanded the IPO anchor investor pool to include insurers and pension funds, who can now join mutual funds and bidding shares ahead of the IPO.
4:25 Speaker 00 The overall anchor quota in an IPO has been raised from one-third to forty percent, with the extra seven percent reserved for these long-term institutions. That means the same anchored pie now has more large investors around the table and mutual funds will have to fight harder for their share of allocations. What does that do to listing day dynamics? Well, when pre-IPO mutual fund checks disappear, some issuers, especially in the SME boards that leaned on last mile pre-IPO capital, may find they must sweeten pricing, resize or defer their listing plans. Others with strong anchor support might sail through. But the comforting signal of XYZ mutual fund already in the cap table vanishes and the quality of the anchor list will matter more than ever. So, is this good or bad for you, the SIP and the IPO investor?
5:10 Speaker 00 In the short run, it's boring and that's a good thing. Your NAV won't depend on whether some company lists on time. If you worry, this newters fund performance. Remember the bigger structural truth of a market. Domestic mutual funds already own north of ten percent of NEC-listed stocks. When a pool that large plays VC-style games, it's everyone's problem. In that sense, boring is beautiful at that scale. Will anything break? Hopefully not, since the IPO machine has fresh rails. Pre-IPO disclosures got tighter this year. Anchor allocations were re-architected to bring in stricter capital and the pipeline remains robust. What changes is the equilibrium since there might be a slightly lumpier set of listing outcomes as the pre-IPO rehearsal round moves offstage.
5:56 Speaker 00 It's a nice reminder that markets don't only need spectacular rules, they need quite architectural ones that keep form true to functional. Mutual funds were inching deal by deal towards something they were never meant to be and Sebi might have just readrew the map. The rich will still find their early seats. Companies will still sit and the rest of us will still buy India in corporation. One SIP or one IPO at a time. So, yes, skip the noise and track two lines in the IPO in the coming months. Who shows up in the anchor list and how IPOs are priced versus planned? I'll see you in the next one.
6:30 Speaker 00 Thank you for listening to today's episode. And if you want to share your feedback or suggestions, do drop us an email to [email protected] . Until next time.
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