Investment funds are not allowed to participate in pre-IPO placements: know the impact on your portfolio – Vision on news from Equitymaster

October 31, 2025

In pursuit of achieving the funds’ stated investment objective, mutual funds have not only invested in the secondary market but have also participated in initial public offerings (IPOs).

Since the beginning of 2020, investment funds have been continuously and vigorously participating in IPOs, especially in the anchor investment segment. This is made possible by the regulatory guidelines that made it mandatory to reserve one-third of the anchor investor’s share for domestic mutual funds.

Fund houses have been anchor investors in a variety of companies – both new and established – across market capitalizations and sectors.

However, the capital market regulator also noticed that investment funds also intensively participated in pre-IPO placements (a type of private placement), which usually happens before the IPO starts for anchor investors. Fund houses have long been involved in pre-IPO placements.

Citing the risk of investing in unlisted shares, the capital market regulator on October 23, 2025, sent a letter to the Association of Mutual Funds in India (AMFI) banning mutual funds from participating in pre-IPO placements.

Pre-IPO placement is a private sale of shares to selected investors before the company officially launches its listing.

What does the letter from the supervisor to AMFI say?

Citing Clause 11 of the Seventh Schedule of the SEBI (Mutual Funds) Regulations, 1996, which prescribes that all investments by mutual funds in equity and equity related instruments shall be made only in ‘listed’ or ‘to be listed’ securities, the regulator has banned mutual funds from participating in pre-IPO placements.

AMFI has been instructed to inform all asset managers (AMCs) about the new restriction and ensure strict compliance.

The letter clarifies that investment funds can only participate in:

• The “anchor investor” portion of an IPO, or
• The ‘public issue’ portion of an IPO (as qualified institutional buyers)

This came in after quite a few queries were received regarding whether mutual funds could participate in pre-IPO placements before the opening of the anchor or public issue.

What is the reason behind the ban?

According to the regulator, participating in pre-IPO exposes the mutual fund to the risk of possibly holding unlisted shares, which Article 11 of the Seventh Schedule of the SEBI (Mutual Funds) Regulations, 1996 does not allow.

The question arises: what if the potential IPO is postponed or canceled? In such a case, the fund and its unitholders are left with a very high position, saddled with illiquid and unlisted securities.

“If the mutual funds are allowed to participate in pre-IPO placements, they may ultimately hold unlisted shares if the issuance or listing cannot be completed for any reason.” the regulator said in a letter to AMFI.

According to the regulator, an ‘anchor investor’ section is already available in which investment funds can participate.

What do investment funds say about this ban?

While the ban is in accordance with Clause 11 of the Seventh Schedule of the SEBI (Mutual Funds) Regulations, 1996, mutual funds feel it is unjust or discriminatory.

This is because currently, the other players such as alternative investment funds (AIFs), non-discretionary PMS, family offices and Foreign Portfolio Investors (FPIs) are allowed to participate in pre-IPO placements as per the current regulations.

According to them, there is also no definition of ‘listed’ securities.

While the regulator worries about liquidity, mutual funds worry that they could miss the first opportunity to generate alpha, which investors often look for. Anchor books of IPOs do not offer as much price advantage compared to pre-IPO placements.

According to investment funds that now have the liquidity (in the form of stress tests), this can be kept under control. Instead of imposing a complete ban, the regulator can take precautionary measures.

What could be the impact on your portfolio?

The ban on pre-IPO placements for investment funds will reduce the very high risk of holding illiquid and unlisted securities.

But if these are brought to market in the near future, missing this early opportunity would also negatively impact the potential returns for you. So ultimately there is an opportunity cost involved.

As a prudent mutual fund investor, you should keep in mind that any level of return you seek carries with it a certain level of risk.

The regulator has taken a step in the interest of investors by preventing mutual funds from investing in pre-IPO placements and ensuring that they only participate in listed and future shares.

That said, if you are making an investment, also make sure you check the portfolio characteristics of the schemes because ultimately that is what determines the returns and entails the risk.

Simply following the returns of an investment fund can be harmful to your assets. So also keep an eye on the risk to which an investment fund exposes you when generating returns.

Moreover, it is unwise to focus your investment portfolio on one particular asset class just because it provides a better return.

To balance the trade-off between risk and return, investing in asset classes such as equities, debt, gold or even holding cash is important.

Invest wisely and follow the most suitable asset allocation for you.

Be a thoughtful investor.

Have fun investing.

Disclaimer: This article is for informational purposes only. It is not a recommendation and should not be treated as such.

With more than twenty years of experience in investments and personal finance, Rounaq Neroy leads the content activities at PersonalFN. Rounaq brings to the table potentially the best investment ideas and perspectives to help investors make wise decisions. Since 2009 he has been an integral part of PersonalFN (an employee of Equitymaster).