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Sebi mulls norms for MF investment in IPOs

December 26, 2022 

MFs can participate in an IPO either as anchor investors or as institutional investors in the general quota for qualified institutional buyers (QIBs).

The Securities and Exchange Board of India (Sebi) may tighten norms for investment by mutual funds in initial public offerings (IPOs). The guidelines may pertain to the post-allotment allocation of shares to various schemes and the due diligence process to be followed for IPO investments, said two people familiar with the matter.

Currently, mutual funds bid for shares at the fund house level, and not at the individual scheme level. There are no standard guidelines on how the allocation has to be made. So, post allotment, a fund house can use its discretion to assign shares to different schemes.

The regulator may dictate all funds to do a scheme-wise allotment. So, when the bids are placed, there will have to be a clear demarcation on which scheme is applying for how many shares. Say, a large-cap scheme is applying for 2 million shares and a flexi-cap scheme from the same fund house is applying for 1 million shares. This will have to be mentioned upfront.

“Orders will have to be given scheme-wise and the system will have to maintain a trail of the list of schemes and the number of shares applied for per scheme. The final allocation will happen accordingly, on a pro-rata basis,” said a person familiar with the matter.

MFs can participate in an IPO either as anchor investors or as institutional investors in the general quota for qualified institutional buyers (QIBs). Out of the QIB quota, 5% shares need to be allocated to mutual funds. Companies have the option to sell up to 60% shares of the QIB book to anchor investors, one-third of which has to be reserved for mutual funds, subject to demand.

Due diligence and limits
The regulator has reached out to mutual funds on the process that is followed for investment in IPOs and the kind of review and research that is done while selecting one IPO over the other. The regulator may ask the trustees to ensure that the rationale for IPO investment is sound and there’s enough due diligence done before investing, according to people in the know. It is not clear if the regulator will also give specific guidelines for the due diligence.

An email sent to Sebi did not get a response.

“Mutual funds do pick up big stakes in some of the IPOs. If the post listing returns are not attractive, it impacts the performance of the scheme. But if you start giving a justification for IPO investment then the same principle can be extended to secondary investments as well. We hope Sebi does not go into the specifics of questioning managers’ investment decisions,” said a senior industry official.

Several MF schemes have subscribed to the IPOs of new age tech companies over the past year, and have received flak after the companies tanked post listing. Some of them even raised stakes in these companies after listing. Shares of PB Fintech, Nykaa, Zomato and Paytm are down 54-65% year to date.

The regulator may set separate scheme limits for MF investment in IPOs. In case of equity funds, a scheme’s portfolio cannot hold more than 10% in a single stock. The rule is aimed at limiting the concentration risk in the overall portfolio of an MF scheme. The 10% limit is applicable to IPO investments as well.

If the limit is revised downwards, larger IPOs could face an issue, said experts. This may, however, help more schemes to participate in IPOs, while reducing the exposure per scheme.

Of the 123 anchor investors that bid for the country’s largest IPO of state-run Life Insurance Corporation of India earlier this year, 99 were domestic mutual funds.

MFs pumped in a cumulative Rs 3,300 crore into eight IPOs that hit the market in November, according to reports.

[The Financial Express]

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