Why mutual funds continue to flock to startup offerings

For MFs, it's about identifying companies with the potential to become future multi-baggers

- Akshat Rohatgi

Social media has been abuzz ever since consumer brand Mamaearth, a startup founded in 2016, came out with its plan for an initial public offering (IPO) recently. The debates have centred around the fundamentals of startup businesses. More importantly, netizens noted with alarm the participation of seven popular mutual funds in the anchor book of Honasa Consumer Ltd, the parent company of Mamaearth, with total commitments of around ₹254 crore.

Painful memories of the overenthusiastic participation of mutual funds (MFs) in the IPOs of new-age internet-based companies, such as Paytm (One97 Communications), Zomato, CarTrade and PB Fintech, continue to haunt retail investors. There were concerns about the high valuations of these companies and the stocks plunged on their listing day. Mamaearth, though, made a lacklustre debut on BSE on Tuesday, a modest premium of 1.85% to the issue price of ₹324,

Investors have now begun to question the wisdom of MF investments in startup IPOs. To be sure, the exposure of these funds is well below 1% of the total AUM (assets under management) of a scheme. However, some funds have had concentrated positions in these stocks as well.

Fund houses can participate in an IPO either as anchor investors or as institutional investors in the general quota for qualified institutional buyers (QIBs). As per norms, 5% of the shares need to be allocated to MFs in the QIB quota. 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. In India, any anchor investment (including by mutual funds) is subjected to a 30-day lock-in period for 50% of their investment and a 90-day lock-in for the balance 50%.

The IPO game