SEBI Bars Mutual Funds from Pre-IPO Placements: What the Move Means for Markets

The Securities and Exchange Board of India (SEBI) has introduced an important change to mutual fund investment rules. Mutual funds will no longer be allowed to invest in pre-IPO placements—shares offered to investors before a company’s official listing on the stock exchange.

What Are Pre-IPO Placements?

Pre-IPO placements are share sales made by a company to institutional or high-net-worth investors before launching its IPO. These shares are often offered at a discount to the expected IPO price to attract early investors.

For mutual funds, pre-IPO placements allowed them to get in early and potentially profit when the shares became public; however, investments also had risks, particularly if the IPO was postponed or cancelled, leaving mutual funds holding annulated or illiquid shares without a proper value.

SEBI Guidelines on Pre-IPO Placements

In a major development dated 24 October 2025, the Securities and Exchange Board of India (SEBI) has disallowed mutual fund schemes from investing in pre-initial public offering (pre-IPO) placements of equity shares and other instruments. Mutual fund investments will now be limited to the anchor investor portion or the public issue of an IPO.

The order has been sent to the Association of Mutual Funds in India (AMFI) and has been issued under Clause 11 of the Seventh Schedule of the SEBI (Mutual Funds) Regulations, 1996, which requires mutual fund investments in only securities that are listed or to be listed on recognised stock exchanges.

SEBI stated that the initiative was initiated following several queries from fund houses on whether they were allowed to invest in pre-IPO placements.

Impact of New Guidelines from SEBI

Here is how the new guidelines will have an impact on the market as a whole:

Impact on Alpha Generation Strategies

Pre-IPO placements were historically used by some mutual fund managers to generate alpha—returns above benchmark—by accessing shares at discounted valuations before public listing. These opportunities often came with favourable terms negotiated privately. With SEBI’s ban, such alpha avenues are closed, forcing funds to rely solely on anchor or public issue segments where pricing is more competitive and transparent. This could compress excess return potential, especially for funds specialising in IPO-linked strategies, and may shift focus toward post-listing arbitrage or sector rotation for alpha generation.

Risk Containment and Liquidity Assurance

There are risks that come with investment in any pre-IPO stock, including illiquidity, unidentified valuation, as well as delays or cancellations of the IPO and listing. If a pre-IPO investment were to be stuck due to a failed listing, it could distort Net Asset Value (NAV) calculations and redemption cycles. By confining investments to listed or “to be listed” securities (i.e., anchor/public IPO), SEBI mitigates systemic risk and ensures that mutual fund schemes maintain daily liquidity and accurate mark-to-market valuation.

Implications for Startup

Startups and private equity-backed firms often use pre-IPO placements to raise capital before listing, leveraging institutional credibility. Mutual funds were attractive participants due to their scale and signalling value. SEBI’s move reduces this pool of capital, potentially increasing reliance on alternative investors like family offices, sovereign funds, or venture capitalists. It may also delay IPO timelines for companies unable to secure sufficient pre-IPO funding, thereby impacting the broader startup ecosystem’s liquidity and exit strategies.

Investor Protection

Retail investors in mutual funds expect daily NAV disclosures based on fair market value. Pre-IPO investments, being unlisted, pose valuation challenges and may require Level 3 inputs (unobservable data), which can distort NAVs. SEBI’s directive ensures that all equity exposures are either listed or imminently listed, allowing NAVs to reflect real-time market prices. This enhances investor trust, reduces valuation subjectivity, and aligns mutual fund disclosures with global best practices in fund governance.

Pricing Dynamics

Mutual fund participation in pre-IPO placements often signalled institutional confidence, influencing IPO pricing and investor sentiment. With this channel closed, IPO-bound companies may face reduced institutional validation before listing. This could lead to more conservative pricing, higher anchor allocations, or increased reliance on roadshows to build demand. The absence of mutual funds in pre-IPO rounds may also shift pricing power toward investment banks and anchor investors, altering IPO book-building dynamics.

Simple Audit Trails

SEBI’s move simplifies compliance for mutual funds by removing the need to track unlisted equity exposures, lock-in clauses, and valuation methodologies for pre-IPO holdings. It also streamlines audit trails, as all equity investments will now be traceable to listed or “to be listed” securities with public disclosures. This reduces operational complexity, enhances regulatory oversight, and minimises the risk of inadvertent breaches or misreporting.

Conclusion

For everyday investors, this move primarily strengthens protection. Mutual funds are custodians of public money, and their exposure to unlisted shares can introduce risks that most retail investors do not fully understand or intend to take.

Now, when you invest in an equity mutual fund, you can be more certain that your money is deployed in listed or soon-to-be-listed companies with clear price visibility. This enhances portfolio transparency and reduces the possibility of valuation mismatches.

In the long term, the rule may lead to a healthier mutual fund ecosystem that prioritises stability and compliance over speculative opportunities.

Sources

Fortune India
News18
Moneylife