Anchor investors, also known as cornerstone investors, play a significant role in IPOs and have gained significant importance in recent years. For IPO investors in India, Anchor Investors isn’t an unknown term but not many are aware about the inner workings and the regulations governing these investors. In this article, we will discuss anchor investors meaning, definition, roles and regulations. We will also cover the benefits of anchor investors and the eligibility criteria for becoming an anchor investor.
What are Anchor Investors in India?
Anchor investors are institutional investors who participate in the IPOs of companies and offer price stability to the issue. Anchor investors are usually Mutual Funds (MFs), Foreign Portfolio Investors (FPIs), and Insurance companies who subscribe to the shares before the IPO is opened for public subscription. Just like an anchor is used to steady a ship, anchor investors are roped in by merchant bankers in order to stabilize the IPO and get better feedback from other investors. They play a significant role in the price discovery process by placing large bids, which indicates the interest of institutional investors in the IPO.
Anchor Investors Meaning – Definition of Anchor Investors
According to the Securities and Exchange Board of India (SEBI), anchor investors are Qualified Institutional Buyers (QIBs) who apply for shares worth at least INR 5 crores or more in an IPO. Anchor investors have to apply one day before the issue opens for public subscription.
While SEBI has no formal definition of anchor investors, it provides a framework to decide the maximum number of anchor investors in the following way:
- maximum of two Anchor Investors, where allocation under the Anchor Investor Portion is up to INR 10 crore
- minimum of two and maximum of 15 Anchor Investors, where the allocation under the Anchor Investor Portion is more than INR 10 crore but up to INR 250 crore, subject to a minimum allotment of INR 5 crore per Anchor Investor; and
- in case of allocation above INR 250 crore under the Anchor Investor portion, a minimum of five such investors and a maximum of 15 Anchor Investors for allocation up to INR 250 crore, and an additional 10 Anchor Investors for every additional INR 250 crore, subject to minimum allotment of INR 5 crore per Anchor Investor.
Role of Anchor Investors in IPOs
Anchor investors are significant players in the IPO process, and their role can be summarized as follows:
Price Discovery: Anchor investors help in price discovery by placing large bids, which indicates the interest of institutional investors in the IPO.
Boosting Investor Confidence: The presence of anchor investors in the IPO provides a sense of confidence to retail investors as it shows the credibility and quality of the company going public.
Offering Price Stability: Anchor investors offer price stability to the issue by committing to holding shares for at least 30 days. Understandably, this commitment helps in absorbing the selling pressure from retail investors on listing.
Anchor Investor Lock-in Period and Other Regulations
Like their bigger counterparts such as QIBs, anchor investors are subject to several rules and regulations. Some of the prominent ones are:
- Anchor investors may be allocated up to 60% of the QIB portion
- Unlike other categories, allotment to anchor investors is on discretionary basis
- One-third of the Anchor investor portion is reserved for domestic MFs
- Anchor investors are not permitted to participate in the IPO through the ASBA process
- Anchor Investors cannot withdraw their bids after the Anchor Investor Bidding Date
- With effect from 1 April 2022, SEBI has mandated anchor investors have a lock-in of 90 days on 50% of the allotted shares while the remaining 50% shares have a lock-in of 30 days from the date of allotment. Prior to April 2022, anchor investor lock-in period was at 30 days for full 100% of the allotted shares.
Benefits of Anchor Investors
There are several benefits of having anchor investors in an IPO and most of these are directly related to their characteristics.
Credibility: A good anchor book, comprising of leading MFs and institutional investors, speaks highly about the credibility and quality of the IPO and the merchant bank.
Efficient Price Discovery: Anchor investors help in discovering the fair price of the shares and prevent underpricing of the issue. When a large group of investors shows willingness to buy at a certain price, it becomes difficult for other investors to bid low.
Higher Subscription: The participation of anchor investors usually attracts HNI and retail investors, resulting in higher subscription levels.
Lower Price Volatility: Since anchor investors have a lock-in period of at least 30 days, it leads to lower volatility in stock prices. In absence of such lock-ins, stock prices have seen immense selling pressure on listing days in the past.
Types of Anchor Investors
Anchor investors can be classified into the following categories:
Mutual Funds: Mutual funds are the most common type of anchor investors in India. They apply for shares on behalf of their clients and invest in the IPO based on their investment objectives.
Foreign Portfolio Investors (FPIs): FPIs are institutional investors who invest in the Indian stock market. They participate in the IPOs of companies that meet their investment criteria.
Insurance Companies: Insurance companies in India are also eligible to become anchor investors in IPOs.
As one can see, Anchor investors serve an important role in Indian primary and secondary markets. Given their size, they may end up giving an impression of having an undue advantage but there are some disadvantages as well to keep a balance. While allotment to anchor investors is on a discretionary basis, they aren’t allowed to sell their holdings before 30 days even if their investment value decreases.
From retail investors perspective, presence of anchor investors in stock market is a boon as they help immensely in reducing the volatility in newly listed stocks and effectively shielding small investors.
Anchor Investor FAQs
What are anchor investors?
Anchor investors are institutional investors who participate and offer price stability to an IPO. In India, anchor investors are usually Mutual Funds (MFs), Foreign Portfolio Investors (FPIs), and Insurance companies.
What is anchor investor lock-in period?
SEBI has mandated anchor investor lock-in period of 30 days on 50% of the allotted shares while the remaining 50% shares have a lock-in of 90 days from the date of allotment. Prior to April 2022, anchor investor lock-in period was at 30 days for full 100% of the allotted shares.
What are benefits of anchor investors?
Some of the major benefits of anchor investors in IPOs are Enhanced Credibility, Efficient Price Discovery, Higher Subscription and Lower Price Volatility.