Anchor investors play a crucial role when a company goes public through an initial public offering (IPO) process. These ‘original’ investors contribute significant amounts to purchase large quantities of shares and inspire confidence among other investors to follow suit. Therefore, the crucial role of anchor investors positions a company’s IPO for success by encouraging greater participation and ensuring price stability.
While most IPO investors are keen to learn more about the trading basics and stock market trading, not many are aware of the key role of anchor investors during IPO launches.
What is an anchor investor?
Anchor investors are institutions that invest in a company’s IPO before it is open to the general public. They aim to foster investor confidence and generate demand for the IPO by committing a substantial amount of capital. Anchors can be large, Qualified Institutional Buyers (QIBs) such as pension funds, mutual funds, insurance companies, or banks.
Key features of anchor investors
- Sophisticated investors: Only Qualified Institutional Buyers (QIBs) can become anchor investors.
- Investor confidence: Anchors encourage more participation of retail investors through their commitments, which is interpreted as a vote of confidence by the market.
- Large commitments: An anchor investor must invest at least Rs. 10 crore in a mainboard IPO (or a minimum of Rs. 2 crore for SME IPOs) with a mandatory lock-in period.
- Early allotment: A guaranteed number of shares are allocated to anchor investors at a fixed price, a day prior to the offer being open to subscription for the public.
- Price discovery: Anchors help in price discovery as their sizeable investment sets a fair price and stabilises the stock after listing.
Read Also: How to Invest in an IPO: Step-by-Step Guide
Anchor investors vs QIBs
Simply put, all anchor investors are QIBs, but not all QIBs are anchor investors. Anchor investors are, therefore, a subset of QIBs who are specifically invited to participate in an IPO. More differences are highlighted below:
| Feature |
Anchor investor |
Qualified Institutional Buyer (QIB) |
|---|
| Timing |
Anchor investors are invited before the IPO opens to the public. |
Other QIBs may participate during the IPO subscription period. |
| Lock-in period |
Mandatory lock-in of 30 days for 50% of the allocation, and 90 days for the remaining 50%. |
No mandatory lock-in is required for QIBs that are not anchors. |
| Disclosure |
Anchor participation is disclosed before the IPO opens. |
Other QIB’s participation can be disclosed after the IPO opens. |
| Allotment |
Anchors’ allotment is guaranteed, at a fixed price, before public subscription. |
Allotment for QIBs is proportionate, during IPO, at the discovered price. |
| Minimum investment |
Rs. 10 crore for mainboard IPO, and Rs. 2 crore for SME IPOs. |
No minimum, but must be a registered institution. |
| Role |
Instills confidence, and helps stabilise IPO price. |
Provides bulk subscription, but less price impact. |
Key facts about anchor investors
- Eligibility: Only institutional investors registered as QIBs (mutual funds, insurance companies, pension funds, and banks) are eligible.
- Allocation limit: Up to 60% of the QIBs allocation quota in an IPO can be reserved for anchor investors, but not more than 30% of the total issue size.
- Number of investors: For IPOs less than Rs. 250 crore, a minimum of 15 anchor investors is required; for larger issues, this number can increase.
- Bidding requirements: Anchor investors, unlike other QIBs, must bid at a specific price and cannot bid at the cut-off price.
- Transparency and credibility: The participation of anchors signals credibility to the market as details of their subscription amounts are publicly disclosed before the IPO opens which guarantees transparency.
Read Also: NFO vs IPO: Key Difference, Similarities and Which is Better?
Lock-in period for anchor investors
Mandatory lock-in periods for anchor investments are put in place to prevent immediate profit booking and ensure price stability after listing. Per regulations, 50% of the allocation to anchor investors must be locked in for 30 days, while the remaining 50% of allocated shares is locked in for 90 days from the date of the allotment.
This structure reduces sharp price drops by not allowing anchor investors to immediately offload their positions after the listing of the stock.
Conclusion
Anchor investors are key participants in IPO processes in India and serve both the companies as well as other investors who have applied. Onboarding an early anchor can help companies navigate IPOs with more certainty and confidence. On the other hand, retail investors benefit because the anchor’s commitment is taken as a strong endorsement that stabilises stock price and instills market confidence during the crucial initial days of an IPO. Whether you are keen on building long-term wealth or prefer short-term momentum trading plays, the right knowledge is always your top ally in the markets. However, do remember to consult a financial expert before making any investment decisions.
FAQs:
What is an anchor investor?
Anchor investor means a large, sophisticated investor, i.e., a qualified institutional buyer (QIB) who invests a significant amount in an IPO before it opens to the public, helping to boost confidence and demand for the issue.
What is the limit of anchor investors?
An anchor must invest a minimum of Rs. 10 crore in a mainboard IPO (or Rs. 2 crore in SME IPOs). Per SEBI, anchor investors can be allotted up to 60% of the portion reserved for QIBs or 30% of the total IPO size.
Who can be an anchor investor?
Only sophisticated institutional investors registered as Qualified Institutional Buyers (QIBs)––mutual funds, banks, foreign portfolio investors (FPIs), insurance companies, and pension funds can be anchor investors.
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