SEBI: Cautious move on pre-IPO shares | Photo credit: HEMANSHI KAMANI
The Securities and Exchange Board of India (SEBI) recently asked mutual funds to stop investing in private equity placements of unlisted companies. SEBI has drawn attention to Clause 11 of the Seventh Schedule of the SEBI (Mutual Funds) Regulations, 1996, which prescribes that all investments by MFs in equity securities shall be made only in listed or ‘to be listed’ securities. Some investment funds appear to have interpreted the ‘being listed’ component broadly, buying shares in private companies that have no IPO plans in the near future. SEBI’s move to put a permanent end to this practice was much needed considering the fiduciary responsibilities of mutual funds.
Over the past five years, India’s private markets have matured and dozens of venture-backed companies have grown. A large pipeline of companies waiting to go public has given rise to a booming but entirely unregulated market for shares in private companies. Employees, angel investors and VCs are transferring their shares to HNIs and family offices looking to store them ahead of a future IPO. But if investing in unlisted companies is a risky strategy for these entities, it is doubly so for mutual funds. First, because all trades in unlisted stocks take place off exchange platforms, there is no transparent order book or valuation to verify the price. Due to the scarcity factor, buyers often pay high commissions and accept competitive prices quoted by a market intermediary. Unlike listed stocks, investing in private companies is hit or miss, with annual filings with the Ministry of Corporate Affairs being the only source of financial information. Two unlisted stocks may experience wide swings in their valuation based on business performance, market preference for it and new rounds of fundraising. Such shares can therefore expose investment funds to large losses. Sometimes IPO plans are postponed indefinitely, closing the exit window for pre-IPO investors. Mutual funds that offer investors an exit at any time cannot afford to acquire such illiquid instruments.
Finally, there is no guarantee that stock prices discovered in the IPO will be higher than those in private markets. In recent months, there have been cases such as HDB Financial and NSDL, where IPO prices had to be set at a discount of 15 to 40 percent to the pre-IPO price. Such cases could lead to large write-downs on investment funds. Therefore, it is best that mutual funds stay the course and only invest in listed instruments with good liquidity and transparent valuation. As anchor investors, they already have the ability to secure strong allocations from IPOs and should be content with this.
Published on November 7, 2025
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