Sebi bars mutual funds from pre-IPO placements, limits investments to anchor and public issues

The Securities and Exchange Board of India (Sebi) has restricted mutual fund schemes from taking part in pre-IPO placements of equity shares or related instruments. Under the revised rules, mutual funds can now invest only in the anchor investor segment or the public issue of an initial public offering (IPO).

As per reports, the latest move is intended to ensure that mutual fund schemes comply with the rule restricting investments to listed or “to be listed” securities.

In a communication to the Association of Mutual Funds in India (AMFI), the Sebi referred to Clause 11 of the Seventh Schedule of the SEBI (Mutual Funds) Regulations, 1996. The clause stipulates that mutual fund investments in equity shares or related instruments must be confined to securities that are either already listed or slated to be listed on a recognised stock exchange.

The Sebi’s clarification follows several queries from fund houses seeking approval to invest in pre-IPO placements — transactions that take place before the launch of the anchor or public issue. The regulator cautioned that such investments could leave mutual funds holding unlisted shares if the IPO were postponed or cancelled.

“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,” Moneycontrol said in a report citing Sebi’s letter.

“Therefore, it is hereby clarified that in case of IPOs of equity shares and equity-related instruments, schemes of Mutual Funds can only participate in the Anchor Investor portion or in the public issue,” the regulator added.

In a consultation paper released on July 31, 2025, the Sebi proposed allowing life insurance companies and pension funds—registered with the IRDAI and PFRDA, respectively—to participate in the anchor investor segment. At present, only mutual funds have a mandatory 33% allocation within this category.

The regulator also suggested raising the overall anchor investor quota from 33% to 40% to encourage greater participation from life insurers, pension funds, and domestic mutual funds. Such a move, Sebi noted, would broaden the base of long-term investors while maintaining the one-third reservation for mutual funds, thereby improving the depth and stability of anchor investments.

The Sebi further observed that retail investors have continued to invest in equity markets through mutual funds despite bouts of market volatility. While direct retail participation has remained largely unchanged over the past three years, investments through mutual funds have seen steady growth.