Retail investors can take MF route for start-up IPOs

Sebi's recently cleared regulations for listing of these entities allow QIBs, which include funds; minimum trading size is Rs 10 lakh

Retail investors intending to play the start-up theme will have to take the mutual fund (MF) route.

To keep retail investors away from the soon-to-be-launched start-up trading platform, the Securities and Exchange Board of India (Sebi) has prescribed a high trading size of Rs 10 lakh. However, it has included MFs in the definition of qualified institutional buyers, enabling indirect entry of non-wealthy individuals in the trading segment.

 

“Considering the risks involved in investing in companies proposing to access the said platform, it is proposed that retail investors may not be permitted to directly participate,” said Sebi in a board note.

Equity MFs are predominately a retail investment product. So, if a fund choose to invest in start-ups, retail investor would be automatically invested in these. It is believed that fund managers are better equipped than small investors to understand the risks. Sebi feels the average retail investor needs a lot of hand-holding and has to be shielded from an environment where the disclosure requirements are less stringent.

However, the other side to the story is that retail investors could be missing on possible future gains. In spite of several suggestions in this regard, such as reducing the size for investment and trading lots, the regulator did not accept these, to shield small investors from risk.

 

Sebi's Primary Market Advisory Committee had recommended a ticket size of Rs 10 lakh and trading lot size of Rs 5 lakh for investing in these companies. In the final guidelines, the regulator revised the trading lot size to Rs 10 lakh. This makes it a platform exclusively for savvy investors such as private equity entities, high net worth clients and venture capitalists.

“The reason behind keeping the retail investors away from such IPOs (initial public offers) is that there is considerable risk involved in these new-age companies, with a very recent track record and disclosure standards considerably diluted. Investing through MFs would reduce the risk, as there would be other securities in the basket, too, mitigating the potential impact. However, it is another point that mutual funds would have to re-work their investment philosophy to make these new-age companies a part of their portfolio,” said Harish H V, partner, Grant Thornton, Indian LLP.

 

MFs said they'd assess the pros and cons of the new trading platform before a plunge. “If I want to consider a start-up in my portfolio, I would need to have a choice of at least more than 10 such listed companies. There will be a lot of variables to be considered before making investment decisions,” said a fund manager, requesting not to be named.
RETAIL INVESTORS IN START-UPS

• Sebi allows retail investors to invest through mutual funds
• Retail investors can invest in start-ups through MFs only, as they fall under QIB
• Sebi has, however, prevented retail investors participation directly into start-ups
• MF players currently not keenly looking at the space