SEBI Bars Indian Mutual Funds from Pre-IPO Placements Over Listing Risks

India's Securities and Exchange Board (SEBI) has prohibited mutual fund schemes from investing in pre-IPO placements, allowing them to invest only in the anchor investor portion or the public issue of an IPO. This clarification was issued because mutual funds investing in pre-IPO shares risk holding unlisted equity shares if the IPO is delayed or cancelled, violating SEBI regulations which require mutual funds to invest only in listed or to-be-listed securities. The directive aims to protect retail investors from the risks associated with unlisted shares and ensures compliance with Clause 11 of the Seventh Schedule of the SEBI (Mutual Funds) Regulations, 1996. Mutual funds had sought clarifications amid pressures to generate returns, but SEBI's stance restricts their ability to participate in early-stage private placements, which are typically available to alternative investment funds and foreign investors. SEBI has communicated this instruction to the Association of Mutual Funds in India (AMFI) and asset management companies to enforce immediate compliance. This move comes as India experiences a record year for funds raised through IPOs, reinforcing regulatory oversight in the capital markets.