The Securities and Exchange Board of India (Sebi) may tighten norms for mutual fund investments in initial public offerings (IPOs). The guidelines may relate to the allocation of shares after allocation to various programs and the due diligence process to be followed for IPO investments, two people familiar with the matter said.
Currently, mutual funds bid for shares at the fund company level rather than at the individual fund level. There are no uniform guidelines on how to allocate. So after the allocation, a fund house can allocate shares to different plans at its own discretion.
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The regulator may require all funds to make a scheduled allocation. When submitting the bids, it must therefore be clearly defined which program is applying for how many shares. Suppose a large cap program applies for 2 million shares and a flexi cap program from the same fund house applies for 1 million shares. This must be mentioned in advance.
“Orders must be placed on a scheme basis and the system must keep a track of the list of schemes and the number of Shares applied for per scheme. The final allocation will be proportionate accordingly,” said a person familiar with the matter.
MFs can participate in an IPO either as anchor investors or as institutional investors at the general quota for qualified institutional buyers (QIBs). 5% of the QIB quota must be allocated to investment funds. Companies have the option, depending on demand, to sell up to 60% of the shares in the QIB book to anchor investors, of which a third must be reserved for mutual funds.
Due Diligence and Limits
The regulator has reached out to mutual funds to discuss the process followed for investing in IPOs and the type of screening and research that is conducted when one IPO is preferred over the other. The regulator may ask trustees to ensure the justification for IPO investments is sound and sufficient due diligence is carried out before investing, experts say. It’s not clear if the regulator will also provide specific due diligence guidance.
An email to Sebi was not answered.
“Funds take big stakes in some IPOs. If post-listing returns are not attractive, this will affect the performance of the program. But once you start providing a rationale for IPO investments, the same principle can be extended to secondary investments as well. We hope Sebi doesn’t go into the details of questioning managers’ investment decisions,” said a senior industry official.
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Several MF programs have subscribed to IPOs by new-age tech companies over the past year, receiving flak after the companies tanked after the listing. Some of them even increased stakes in these companies after the listing. PB Fintech, Nykaa, Zomato and Paytm shares are down 54-65% year-to-date.
The regulator may set separate scheme limits for MF investments in IPOs. For stock funds, a system’s portfolio may not hold more than 10% in any single stock. The regulation aims to limit the concentration risk in the overall portfolio of a MF system. The 10% limit also applies to IPO investments.
If the limit is revised downwards, larger IPOs could face a problem, experts said. However, this can help more systems participate in IPOs, while also reducing the risk per system.
Of the 123 anchor investors who applied for the country’s largest IPO for state-owned Life Insurance Corporation of India earlier this year, 99 were domestic mutual funds.
MFs reportedly pumped a total of Rs 3,300 crore in eight IPOs that floated in November.
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