Anchor Investors in an IPO

SEBI introduced anchor investors in 2009. Any Qualified Institutional Investor (QIB) who invests at least Rs 10 crore or more is called an anchor investor in IPOs. Banks, pension funds, asset management or mutual fund companies, foreign institutional investors, insurance companies, etc. can act as anchor investors. Let’s discuss the minimum value of anchor investment in main board and for SME IPOs, the lock-in period, the minimum reservation for the anchor quota in IPOs and the share allocation or allotment process in the anchor investor category.

Anchor investors have a significant influence on the pricing of public offerings, generate interest from QIBs and also attract retail investors by creating confidence in the IPO offering.

Anchor investors bid for an IPO at a fixed price within the price range. They can bid one day before the IPO offer opens and the shares are allotted to them on the same day.

On April 1, 22, SEBI revised several guidelines for anchor investors.

Before we proceed, let’s first understand what does anchor investor means.

Anchor Investors Meaning

Anchor investors are qualified institutional buyers (QIBs) who bid at least Rs 10 crore in an IPO.

Any registered institutional investor, be it banks, provident funds, foreign institutional investors, mutual fund companies, etc., can be an anchor investor.

As an anchor investor, they bid at a fixed price, which helps boost retail investor confidence in the IPO and increase public demand for the IPO.

Each IPO is opened for subscription by anchor investors one day before the issue opening date.

Anchor Investors Minimum Investment

Anchor investors invest a substantial amount in an IPO. However, the minimum investment amount for anchor investors is different for mainline and SME IPOs.

In a mainboard IPO, anchor investors make a minimum bid of Rs 10 crore. However, the minimum investment amount is Rs 1 crore in SME IPO.

Anchor Investor Lock-in period

Can anchor investors sell shares on the listing day? No.

Since anchor investors invest a large amount in an issue, they can influence the IPO price to a large extent. If they sell the shares allotted to them immediately after listing, share prices can fall sharply. To prevent such volatility in share prices, SEBI has put some restrictions on anchor investors by imposing a lock-in period.

There is a minimum lock-in period of 30 days for anchor investments in an IPO. Anchor investors are not allowed to sell the allotted IPO shares during the lock-in period and must hold the shares in their demat account.

In anchor investors' portion, 50% of the shares allotted to them are locked-in for 30 days and the remaining 50% of the allotted shares are locked-in for 90 days. The lock-up period begins on the date of allotment of the shares and not on the date on which they bid for the issue.

After the lock-in period has expired, they are allowed to sell their shares.

Anchor Investors Reservation in IPO

Generally, in any public issue, shares are reserved for three categories of investors: QIBs (Qualified Institutional Buyers), High Net Worth Individuals (HNIs) and Retail Individual Investors (RIIs).

As anchor investors are a subset of QIBs, a company can allocate a maximum of 60% of issue portion available to QIBs. Means a company is allowed to allot 60% of the IPO shares reserved for QIBs or 30% of the total IPO issue size to the anchor investors.

Let’s take an example to understand it.

Suppose a company offered Rs 10,000 Cr IPO to the public. Now, issue size reserved for QIBs, NIIs, and RIIs will be as follows;

QIB: 50% i.e., Rs 5,000 Cr

NII: 15% i.e., Rs 1,500 Cr

RII: 35% i.e., Rs 3,500 Cr

The issue has Rs 5,000 Cr reserved for QIBs, out of which, 60% i.e., 3,000 Cr can be allotted to anchor investors. Thus, the company can allocate total IPO shares worth Rs 3,000 Cr under the Anchor Investors Portion. All-in-all, anchor investment in an issue is capped at 60% of QIB quota or 30% of the total issue size.

Out of total allocation in Anchor Investors category, 1/3^rd of the total shares are reserved for allotment to domestic mutual fund houses.

IPO Allotment to Anchor Investors

SEBI has laid down some rules a company must follow while allotting shares under the anchor investment quota. Here are the IPO allotment rules applicable to anchor investors;

• A company may allocate a maximum of 30% of the total issue size or 60% of the QIB quota to anchor investors.
• The allocation of shares to anchor investors is at the discretion of the company. The issuing company in consultation with lead managers may decide on allotment to anchor investors subject to SEBI ICDR regulations.
• Anchor investors shall pay the IPO Bid Amount at the time of IPO subscription.
• Allotment of shares to anchor investors will be finalized on the same day of bidding. This means that the allotment is also made one working day before the date of opening of the offer.
• In all public issues where the allotment to anchor investors is not more than Rs 10 cr, there can be a maximum of 2 anchor investors.
• In issues where the reservation for anchor investors is more than Rs 10 crore but less than Rs 250 crore, a minimum of 2 and a maximum of 15 anchor investors can be allowed.
• For IPOs exceeding the anchor size of more than Rs 250 crore, the number of anchor investors can go up to 25.
• The shares are allotted to the anchor investors at a fixed price within the price band. If during the book building process, the share price fixed for allotment turns out to be higher, the anchor investors will have to pay the difference. If the share price is lower, the investors receive the price difference back.
• Anchor investors cannot withdraw or cancel their bid once it has been submitted.
• Anchor investors cannot lower their bid after submission.
• BRLMs (Book Running Lead Managers) or affiliates of BRLMs or company promoters cannot participate in an IPO under the anchor investor quota.

Role of Anchor Investors in IPO

As a potential investor, you need to be aware of the role that anchor investors play in an IPO;

• Since anchor investors bid for large amounts over Rs 10 crore, they play an important role in the share price discovery.
• When an IPO attracts a lot of interest from anchor investors, it boosts investor confidence in the particular issue. It gives potential investors a strong sense of confidence that the IPO is worth investing in. Anchor investors drive public demand for the IPO.
• Not only price discovery, but anchor investors also play a role in the stability of the IPO price. Since SEBI prevents these investors from selling their shares, it helps the companies to stabilize their share price once the issue is listed on the stock exchange.