Pre-IPO Strategy
Also written Pre-IPO investing · Pre-IPO placement strategy
An AIF mandate to subscribe to a company's shares before its IPO at a discount to the issue price, accepting the ICDR lock-in that runs from the date of listing.
In plain language
Before a company lists, it often sells shares privately to a few large investors. Those shares come cheaper than the IPO price, because the buyer commits a large amount, takes the risk that the IPO does not happen as planned, and accepts that the shares cannot be sold immediately after listing.
A fund following a Pre-IPO Strategy is built to do exactly this: find companies close to listing, buy in at a discount, and hold through the lock-in.
The discount is the return the fund is paid for liquidity it gives up and risk it takes on. It is not a guaranteed profit — the listed price can fall below what the fund paid before the lock-in ends.
How it works
Definitions (Chapter 11, section 11.2.4.3).
- Pre-IPO shares: shares with unique identification numbers issued to employees or institutional investors — including AIFs — before the shares are offered to the public in an IPO.
- They are offered at a discount to the issue price, because of the large amount invested and the risk taken.
- Pre-IPO placement: the allotment of pre-IPO shares to certain institutional investors just before the IPO date.
- Lock-in: under the SEBI (ICDR) Regulations, 2018, institutional investors including AIFs subscribing to pre-IPO shares or a qualified institutions placement are subject to a lock-in from the date of listing.
Which category? The workbook is not consistent. Chapter 6 places Pre-IPO Funds in Category II alongside debt funds and private equity funds. Chapter 11 describes "a Category III AIF pursuing a Pre-IPO Strategy" and lists Category III AIFs among holders of pre-IPO shares. For a question on the Chapter 6 category comparison, answer Category II; for a question built on the Chapter 11 strategy description or its example, expect Category III.
How it fits the funding stages. The pre-IPO round is the mezzanine round — funding for listing formalities, with anchor investors allotted shares at a reasonable discount to the issue price and employees able to sell ESOP shares.
Portfolio weight. In the workbook's illustrative Chapter 6 allocation made purely in Category II AIFs, pre-IPO placements take 10%, alongside PIPEs and listed stock (10%) and M&A and co-investments (10%).
The formula
Discount per share = Issue price - Pre-IPO price
Discount % = Discount per share / Issue price
Post-IPO stake = Pre-IPO shares / Total shares after the IPO
A worked example
The workbook's Example 11.8. Fund PPI follows a Pre-IPO Strategy. On 15 January 2023 it buys 2,50,000 shares of privately held Company ABC at Rs 120 a share. ABC's IPO of 10,00,000 shares at Rs 130 completes on 15 June 2023.
| Holder | Shares | Price (Rs) | Holding |
|---|---|---|---|
| Fund PPI | 2,50,000 | 120 | 16.67% |
| Mutual funds | 1,50,000 | 130 | 10.00% |
| Non-institutional investors | 2,00,000 | 130 | 13.33% |
| Retail individual investors | 3,50,000 | 130 | 23.33% |
| Promoters | 5,50,000 | — | 36.67% |
| Total | 15,00,000 | 100% |
The arithmetic.
| Line | Figure |
|---|---|
| Discount per share | 130 − 120 = Rs 10 |
| Discount % | 10 ÷ 130 = 7.69% (the workbook rounds to 7.70%) |
| Cost of the stake | 2,50,000 × 120 = Rs 3 crore |
| Value at the issue price | 2,50,000 × 130 = Rs 3.25 crore |
| Stake after the IPO | 2,50,000 ÷ 15,00,000 = 16.67% |
Of the 15,00,000 shares, 7,00,000 came through the IPO, 5,50,000 are the promoters' and 2,50,000 are Fund PPI's pre-IPO shares. The Rs 25 lakh gain at the issue price is on paper until the ICDR lock-in from the listing date ends.
Two slips in the example. It says Fund PPI bought the shares from the promoter but later calls them shares issued as pre-IPO shares; and it dates the lock-in from 15 June 2020 where the listing was on 15 June 2023.
Why NISM asks about it
Chapter 11 (Investment Strategies, Investment Process and Governance of Funds), section 11.2.4.3 defines pre-IPO shares, pre-IPO placements and the strategy, with Example 11.8; section 11.1.1 covers the mezzanine round. Chapter 6 (Alternative Investment Funds in India and its Suitability) places Pre-IPO Funds in Category II and uses pre-IPO placements in its allocation example. Expect a computation of the discount and post-IPO stake, a question on when the lock-in starts (from listing), and a category question where the two chapters differ.
Common exam traps
- The lock-in runs from the date of listing, not from the date the fund bought the shares.
- Discount is measured against the issue price — Rs 10 on Rs 130 is 7.69%, not Rs 10 on Rs 120 (8.33%).
- Category conflict: Chapter 6 says Pre-IPO Funds are Category II; Chapter 11's strategy and example use a Category III AIF. State the chapter you are answering from.
- Post-IPO stake uses total shares after the IPO — 15,00,000, not the 10,00,000 offered.
- Pre-IPO placement happens just before the IPO date; the example's purchase five months earlier is described as a private placement.
- The discount is not a guaranteed gain — the listed price can fall below cost during the lock-in.
Check yourself
1.A Category III AIF with a Pre-IPO strategy buys shares of Company Vardhan through a private placement at ₹180 per share. Vardhan's IPO is later priced at ₹200 per share. Measured as in Example 11.8, what discount did the fund get, and from when does its lock-in run?
- a)11.11%, measured on the fund's purchase price, with no lock-in because the shares were bought before the IPO
- b)A discount of ₹20, i.e. 10% of the issue price, with a lock-in running from the date of listing under the SEBI (ICDR) Regulations
- c)10% of the issue price, with a lock-in running from the date of the private placement
- d)20%, with a lock-in running from the date of the IPO announcement
Show the answer
Answer: (b) A discount of ₹20, i.e. 10% of the issue price, with a lock-in running from the date of listing under the SEBI (ICDR) Regulations
Example 11.8 measures the discount against the IPO issue price: "The discount received is INR 10 per share or 7.70% off the Issue Price" (₹10 ÷ ₹130). Here: ₹20 ÷ ₹200 = 10%.
On lock-in: "As per the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 institutional investors including AIFs, subscribing to Pre-IPO shares or a Qualified Institutions Placement (QIP), are subject to lock-in period from the date of listing of such shares through an IPO." The workbook explains the discount this way: pre-IPO shares are offered "at a discount to the issue price... due to sufficiently large amount of investments made and risk taken by such institutional investors."
Why the others are wrong:
- 11.11% divides by the purchase price, not the issue price, and "no lock-in" contradicts ICDR.
- Lock-in from the private placement date uses the wrong start date. It runs from listing.
- 20% confuses the ₹20 rupee discount with a percentage, and the IPO announcement is not the reference date.
Where this is taught
Free preparation for NISM Series XIX-CRelated terms
- Anchor investorA qualified institutional buyer allotted shares a day before a book-built issue opens — at least Rs 10 crore on the main board or Rs 2 crore on the SME exchange — under a discretionary, locked-in allocation.
- Category III AIFThe AIF category for funds running diverse or complex trading strategies with leverage — hedge funds and their kin — and the only category denied tax pass-through status.
- Employee Stock Option PlanA right, not an obligation, for an employee to buy employer shares at a pre-fixed price — taxed twice: as a salary perquisite on exercise, and as capital gains on eventual sale.
- Initial Public OfferThe first offer of a company's shares to the public — by fresh issue, by existing shareholders selling through an offer for sale, or both — after which the shares must be listed.
- Category II AIFThe residual AIF category: anything that is neither Category I nor Category III and takes no fund-level leverage beyond a narrow temporary carve-out — private equity, private debt and fund-of-funds.
- Lock-in PeriodThe stretch of time after an investor commits money to a Category III AIF during which they cannot redeem — not fixed by SEBI, but 2 years is common practice.
- Mezzanine RoundThe last private round before listing: pre-IPO money that pays for listing formalities, often with anchor investors allotted shares at a discount to the IPO price and ESOP holders selling out.
- Taking privateA buyout of a listed company by acquiring the shares held by the public — in India through SEBI's delisting process for promoters, or a Takeover Code open offer for an external acquirer.
- Event-driven StrategyA Category III AIF strategy taking long or short positions in one target company around a significant corporate event — a merger, acquisition, spin-off, restructuring or management change.