How the rise of institutional investors is changing the IPO playbook

India’s IPO market is undergoing a structural change. The framework is no longer simply about how much capital companies can raise, but who is providing that capital, at what valuation and with what degree of conviction. Mutual funds, AIFs, insurers, global institutions and increasingly family offices are creating a deeper institutional ecosystem around India’s primary markets. The real question is ‘Are we at the most optimum framework or we need tweaks to get there?’.

From Expanding Capital to Conviction

India’s primary market is broadening alongside a rapidly expanding institutional capital base. The mutual-fund industry’s AUM reached ₹85.76 lakh crore in July 2026, nearly three times the ₹35.32 lakh crore recorded in July 2021, while investor folios have risen from 10.55 crore to 28.09 crore over the same period. Besides, the institutional ecosystem is widening beyond mutual funds, with AIFs, insurers, pension funds, global institutions and family offices increasingly participating at different stages of the capital-formation cycle.

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This deepening pool of capital is coinciding with a broadening primary market. India recorded 109 mainboard IPOs raising ₹1.76 lakh crore in 2025, alongside a substantial SME pipeline, while the second half of 2026 is expected to be stronger and potentially surpassing last year’s capital formation. Yet the quantum of capital is only one part of the story. The 2026 IPO data depicts average subscription at around 25.5 times, compared with a median of just 3.4 times—illustrating how headline oversubscription can mask significant differences in investor conviction.

This is an important trend in the primary market. Mutual funds bring scale and recurring domestic savings; AIFs bring flexibility across listed, unlisted and pre-IPO opportunities; insurers and pension funds provide long-term capital; global institutions bring international pools of capital; and family offices are increasingly participating earlier in the capital-formation cycle. The result is not simply more money chasing IPOs, but more differentiated pools of capital assessing businesses on their fundamentals, growth visibility, capital efficiency and valuation.

The next phase of India’s primary market must therefore be about better segmentation, deeper institutional participation and sharper price discovery. The opportunity is no longer simply to generate subscriptions; it is to identify businesses where growth, capital efficiency and valuation converge. As institutional investors become more discerning, that distinction will increasingly determine which companies earn capital and which attract mere attention.

Strong Capital, Selective Participation

Notably, a trend that is being consistently observed at present is that the Mutual fund houses have strong capital but participation in capital markets is very selective. Mutual funds invested nearly ₹9,789 crore across 11 IPO anchor books in July 2026, with allocations concentrated in a handful of larger offerings: ₹7618 Cr in three IPOs i.e. INDO-MIM, SBI and Manipal Health Enterprises.

Scale is emerging as an important consideration in how institutional capital participates in India’s IPO market. The largest mutual fund houses are not restricted to large issues and their CY26 participation includes several IPOs below ₹1,000 crore. However, the distribution is still skewed towards larger offerings. Of the 30 unique IPOs backed by the top five mutual fund houses, 19 had issue sizes of ₹1,000 crore or more, while only one was below ₹500 crore. The median issue size of these IPOs was around ₹1,100 crore. For a smaller IPO, even a modest institutional allocation may represent a meaningful proportion of the issue, while the absolute investment may remain relatively small for a large mutual fund scheme.

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A Broader Institutional Ecosystem: Complemented by Alternates

The institutionalization of India’s capital market extends beyond mutual funds. SEBI data shows that AIFs had ₹16.94 lakh crore in cumulative commitments and ₹6.76 lakh crore in investments as of March 2026. Of the investments, ₹4.97 lakh crore was deployed in equity and equity-linked instruments, spanning listed, proposed-to-be-listed, SME-listed and unlisted securities, while the balance was invested across debt securities, units of AIFs, REITs/InvITs and other instruments. This makes AIFs an important bridge across the capital-formation cycle, with the ability to participate not only in listed markets but also in private and pre-IPO opportunities. Alongside AIFs, family offices are also becoming increasingly active in pre-IPO transactions, adding another layer of sophisticated, long-term capital to India’s primary-market ecosystem. India now has more than 300 family offices, and their participation is increasingly moving upstream into pre-IPO opportunities.

Insurance companies and pension funds are also becoming more visible in IPOs. SEBI has increased the anchor portion to 40% of an issue, with one-third reserved for domestic mutual funds and the remaining portion for insurance companies and pension funds.

Outlook and Way Forward: The Need for a Micro-cap Category

While the capital market is structurally strengthening, the investment framework is not evolving at the same pace as the capital base. Under the current framework, the top 100 companies by full market capitalization are large caps, ranks 101–250 are mid-caps and companies ranked 251 onwards are small caps. The latest classification puts the mid-/small-cap boundary at roughly ₹33,000–34,000 crore.

This creates an unusually wide small-cap universe. A company with a ₹30,000-crore market capitalization and one at ₹3,000 crore or even lower, technically fall into the same category, despite very different levels of scale, liquidity, research coverage and risk.

Further, as institutional capital deepens, there is a case for considering a micro-cap category below small caps, with calibrated allocation limits and appropriate liquidity and risk parameters. This would not mean forcing institutions into smaller companies; it would give investors greater granularity to assess opportunities across the spectrum.

Notably, the regulatory framework is evolving with greater flexibility and speed, supporting more efficient capital formation. SEBI’s recent decision to allow issuers to resize the fresh issue component by up to 50% without refiling the DRHP recognizes that capital requirements and market conditions can evolve during the IPO process. Similarly, a calibrated approach to mutual fund categorization could enable greater institutional participation in the micro-cap segment, while maintaining investment discipline and robust investor protection.

(The author Mahavir Lunawat is Chairman, Association of Investment Bankers of India (AIBI) and CMD, Pantomath Capital. Views are own)

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