Sebi prohibits participation of mutual funds in pre-IPO share placements

New Delhi: Markets regulator Sebi has prohibited mutual funds from investing in pre-IPO (initial public offering) share placements but has allowed them to invest in anchor rounds, a source said on Friday.

This step is aimed at boosting liquidity and enhancing transparency in the valuation of companies coming out with their initial share sale.

“We have asked mutual fund schemes not to invest in pre-IPO placement of shares but invest in anchor rounds,” he added.

Earlier this month, Sebi amended rules to revamp the share-allocation framework for anchor investors in maiden public offerings, a move aimed at broadening participation by domestic institutional investors such as mutual funds, insurance companies, and pension funds.

Under this, the regulator increased total reservation in the anchor portion to 40 per cent from 33 per cent earlier. This comprises 33 per cent for mutual funds and the remaining 7 per cent for insurers and pension funds.

If the 7 per cent reserved for insurers and pension funds remains unsubscribed, it will be reallocated to mutual funds.

Additionally, the source said that Sebi would soon replace the mandatory abridged prospectus in IPOs with a standardized “offer document summary” to make disclosures more investor-friendly.

The regulator believes that even the abridged prospectuses for IPOs are too voluminous, which deters retail investors from reviewing them.

With regard to derivative trading, the source said that “irrational exuberance” among a class of people, or retail investors, is causing them to lose money.

Moreover, Sebi is planning to undertake a comprehensive review of its mutual fund and stock broker regulations at its board meeting next month, as the markets regulator seeks to make these frameworks more relevant and efficient, a senior official said on Friday.

The issues will be taken up at the board meeting scheduled for December 17, the official added.

The Securities and Exchange Board of India (Sebi) has already released consultation papers on both sets of regulations.

In October, the regulator issued a consultation paper proposing an overhaul of mutual fund rules, including a clearer definition of the Total Expense Ratio (TER) and revised limits on brokerage charges.

These recommendations are aimed at enhancing transparency, rationalising information, reducing redundancies, and easing compliance, the official noted.

As part of the proposed framework, Sebi plans to remove the additional 5 basis points (bps) that asset management companies (AMCs) were previously allowed to levy across mutual fund schemes.

This additional expense, introduced to offset the impact of crediting exit loads back to schemes, was first set at 20 bps in 2012 and later reduced to 5 bps in 2018. The additional expense of 5 bps that mutual fund schemes were allowed to charge was transitory in nature.

To further improve clarity, Sebi also suggested excluding all statutory levies such as STT, GST, CTT and stamp duty from TER limits, along with currently permissible expenses for brokerage, exchange, and regulatory fees.

At present, GST on management fees is allowed over and above the TER limit, while other statutory charges fall within the prescribed cap for mutual fund schemes.

The regulator recently extended the deadline for public comments on the proposal to November 24 from November 17 earlier.

In addition to mutual fund rules, the board will also take up the proposal to review the 1992 stock broker regulations. As part of this revamp, Sebi proposed introducing a definition for ‘algorithmic trading’ to streamline compliance requirements, as the current framework lacks any such clarity.

“Regulations for stock brokers were framed 30 years ago and Sebi is looking to update them,” the official said.

The December 17 meeting will also consider the report of a high-level panel that examined conflict-of-interest safeguards within the organisation.

Last week, the regulator indicated that the panel’s recommendations would be presented to the board.

In its report, the panel proposed wide-ranging reforms to strengthen transparency, including enhanced disclosures and a “zero-tolerance” approach to conflicts of interest among senior officials.

The high-level panel submitted its report to Chairman Pandey on November 10. The report also recommended setting up a secure and anonymous whistleblower system for reporting conflict of interest, ban on expensive gifts, a two-year restriction on post-retirement assignments, and creating a post of chief ethics and compliance officer (CECO).