Anchor Investors in IPO

Initial Public Offerings (IPOs) have become one of the most popular investment tools in India. Before an IPO opens for public subscription, a special category of institutional investors known as Anchor Investors participates in the issue.

Anchor investors' participation boosts the investors' confidence and creates positive sentiment around the IPO. This article discusses anchor investors, their eligibility criteria, role in IPO, lock-in period and the applicable SEBI guidelines.

Who are Anchor Investors in IPO?

Anchor investors are large institutional investors that invest in an IPO before it opens for public subscription. They are part of the Qualified Institutional Buyer (QIB) category and receive shares through a dedicated anchor investor allocation.

These investors include mutual funds, insurance companies, foreign portfolio investors (FPI), pension funds, sovereign wealth funds, and banks. Their early participation shows confidence in the company’s business model, valuation, and growth prospects.

Anchor Investors are allotted shares one working day before the IPO opens for subscription. Their investment acts as a signal to retail and institutional investors regarding the attractiveness of the issue.

Features of Anchor Investors

Here are the key features of Anchor investors:

• Early Participation:

Anchor investors invest one day before the IPO opens, indicating institutional confidence and helping to create positive market sentiment.

• Part of QIB Category:

Anchor investors belong to the Qualified Institutional Buyers segment and are subject to SEBI regulations and eligibility requirements.

• Large Investment Amount:

Anchor investors are required to invest a minimum of ₹10 crores in the IPO, often depending on the issue size.

• Dedicated Allocation:

A specific portion of the QIB quota is reserved exclusively for anchor investors before public bidding begins.

• Full Payment Requirement:

Anchor investors must pay the entire investment amount at the time of application without any instalment facility.

• Restricted Withdrawal:

Once a bid is submitted, anchor investors cannot revise or withdraw their application from the issue.

• Lock-in Requirement:

Shares allotted to anchor investors remain subject to an IPO lock-in period as prescribed by SEBI regulations.

Also Read: Types of Investors in IPO

Eligibility Criteria of Anchor Investor

To become eligible as an Anchor Investor for an IPO, SEBI has provided certain guidelines, which are as follows:

• Qualified Institutional Buyer Status:

Only entities classified as QIBs under SEBI regulations can participate as anchor investors in an IPO.

• Minimum Investment Size:

Anchor investors must bid at least for ₹10 crore in a mainboard IPO and ₹1 crore in an SME IPO.

• Institutional Nature:

Mutual funds, banks, insurance companies, pension funds, and foreign portfolio investors commonly qualify as anchor investors.

• Regulatory Compliance:

Eligible institutions must comply with all SEBI rules governing IPO participation and securities market investments.

• Financial Strength:

Investors should possess adequate financial resources to make large-scale investments in public offerings.

• Timely Application:

Anchor investors must submit their applications before the IPO opens for public subscription.

Role of Anchor Investors in IPO

Anchor investors play an important role in the success of an IPO. Here are a few points to describe the importance of Anchor investors.

• Boosting Investors' Confidence:

The participation of anchor investors boosts the confidence of retail investors and reassures them about the quality and valuation of the issue.

• Enhancing IPO Demand:

Early institutional demand creates positive momentum and improves subscription levels during the IPO period.

• Price Discovery Support:

Anchor investors help establish fair pricing by evaluating company fundamentals before making investment decisions.

• Improving Market Perception:

Strong anchor participation often generates favourable market sentiment and attracts broader investor interest.

• Increasing IPO Credibility:

Reputed institutions investing in an IPO strengthen trust in the company and its prospects.

Supporting Fundraising:

Their investments contribute significantly to successful capital raising efforts by issuing companies.

SEBI Guidelines on Anchor Investors

The Securities and Exchange Board of India (SEBI) introduced the anchor investor framework in 2009 to strengthen investor confidence in the IPO process. Since then, Anchor investors have become an important part of many IPOs, especially those of large and well-established companies.

According to SEBI regulations, Anchor Investors are classified under the Qualified Institutional Buyers (QIB) category. To participate, they are required to invest a minimum of ₹10 crore in the mainboard IPO and submit applications one day before the issue opens for public subscription.

There must be a minimum of 15 anchor investors if the issue size is less than ₹250 crores. However, if the offer size is more than ₹250 crores, the number of anchor investors can be increased to 25.

Lock-in Period For Anchor Investors

Lock-in period in an IPO refers to the timeframe during which anchor investors cannot sell their shares. In India, Anchor investors have a lock-in period from the date of IPO allotment.

As per SEBI regulations, Anchor investors can sell 50% of their shares after completing the 30-day lock-in period. The remaining 50% of their shares can be sold after completion of a 90-day lock-in period from the date of allotment.

This lock-in requirement ensures that institutional investors remain committed to their investment for a specific duration after share allotment.

How Anchor Investors Impact IPO Subscription?

Anchor investors play a crucial role in influencing IPO subscription levels. Since they invest before the issue opens to the public, their investment acts as an endorsement of the company's brand name. Retail investors often check the list of anchor investors before making investment decisions.

Strong anchor participation can increase confidence among retail, non-institutional, and institutional investors, resulting in higher subscription numbers across categories.

On the other hand, weak anchor participation may indicate limited institutional interest, which can affect market perception and investor sentiment. Therefore, anchor investor allocation is often considered an important indicator of an IPO’s potential success.

How Do Companies Select Anchor Investors in India?

Here is how companies select anchor investors in India:

• Selection Through Lead Managers:

Investment bankers identify suitable institutional investors based on market reputation and investment capability.

• Preference for Reputed Institutions:

Companies generally prioritise established mutual funds, insurance companies, and foreign institutional investors.

• Assessment of Investment Capacity:

Investors with the ability to make large commitments are preferred for anchor allocation.

• Evaluation of Long-Term Investment Approach:

Companies often favour institutions known for maintaining investments rather than pursuing short-term gains.

Anchor Investors vs QIB

Here is the difference between Anchor investors and qualified institutional buyers in a tabular format.