In today’s Finshots, we try to explain why mutual funds can no longer access the pre-IPO market.

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The Story

“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 on a recognized stock exchange.”

That’s Clause 11 of the Seventh Schedule of the SEBI (Mutual Funds) Regulations, 1996. 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 to large institutional investors before the IPO opens. These aren’t 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 the Association of Mutual Funds in India (AMFI) clarifying that mutual funds cannot participate in pre-IPO placements. If they want IPO exposure, they’ll have to invest like everyone else — either as anchor investors (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.

1. Daily liquidity i.e. investors can redeem their money anytime.

2. Transparent pricing i.e. 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. Mutual funds manage over ₹75 lakh crore 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 higher returns stops. It migrates to alternative investment funds (AIFs) and private-equity (PE) 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 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 cheques (like investors in AIFs and PE) and those who can’t.

Companies planning to go public will feel this too. Pre-IPO rounds often doubled up as a rehearsal for valuation. They’re a way to test demand, anchor narrative, and earn a credibility stamp before hitting the market. But now, more of the price 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 in bidding shares ahead of the IPO. The overall anchor quota in an IPO has been raised from one-third to 40%, with the extra 7% reserved for these long-term institutions. That means the same anchor 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 cheques disappear, some issuers (especially on 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?

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. And if you worry, this neuters fund performance. Remember the bigger structural truth of our market: domestic mutual funds already own north of 10% of NSE 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 stickier 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.

It’s a nice reminder that markets don’t only need spectacular rules; they need quiet, architectural ones that keep form true to function. Mutual funds were inching, deal by deal, toward something they were never meant to be, and SEBI might have just redrew the map.

The rich will still find their early seats, companies will still list, and the rest of us will still buy India Inc. one SIP or IPO at a time.

So yeah, 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.

Until then…

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