Over the last few decades, IPOs have become one of the most popular investment options among investors because of the short-term gains opportunities they offer. Those who are familiar with IPOs know that a select category of investors plays a very important role in the IPO allotment process: anchor investors.
Also known as cornerstone investors, anchor investors help companies attract investors by giving them trust and confidence.
If you plan to invest in an IPO, learning about anchor investors and their significance can help you make an informed decision.
With this in mind, we have created this post to help you understand what an anchor investor is, how they work, how they benefit, and more.
Anchor Investor Meaning: Who Are the Anchor Investors?
SEBI (Stock Exchange Board of India) introduced the anchor investor concept in 2009. According to the definition, an anchor investor is a qualified institutional buyer (QIB) who buys a large portion of a company’s share a day before the official launch of its initial public offering (IPO).
The anchor investors can be any reputed financial institution, mutual fund house, commercial bank, pension fund provider, etc. Their primary role is to enhance the company’s credibility and encourage retail investors to invest in its IPO.
Simply put, anchor investors demonstrate trust and confidence in the company’s growth potential, which not only results in increased demand and better prices for the upcoming IPO but also instills a sense of confidence in the company’s future among potential investors.
Reservation and Lock-in Period for Anchor IPO Investors
As per SEBI (Stock Exchange Board of India), companies can allocate a maximum of 60% of the allotted IPO for the QIBs (Qualified Institutional Buyers) category to anchor investors. One-third of this anchor investor portion is reserved for domestic Mutual Funds that wish to apply under the anchor investor category. Moreover, an anchor investor must invest a minimum of ₹10 crore in an IPO.
In the lock-in period, shares owned by anchor investors have a lock-in period of 30 days for 50% of their shares and 90 days for the remaining 50% from the allocation date. This lock-in period not only results in lower volatility in stock prices but also acts as a stabilizing factor, providing a sense of security to potential investors.
Example of Anchor Investors in IPO?
Suppose ABC company plans to launch an IPO with 10,000 shares and is seeking anchor investment to attract other retail investors. Before its public appearance, the company reached out to large investment entities, like mutual fund houses or banks, and offered them a large block of shares at a discounted rate. For instance, 3,000 shares are given to AMCs, 2,000 to private banks, and 1,000 to other wealthy companies. The remaining 4,000 are kept for the public.
This anchor investment by trusted firms attracts other investors by giving them confidence and credibility. It also helps in stabilizing the stock price of the company after the end of its IPO.
What are the Bidding Rules for Anchor Investors in an IPO?
Following are the key features and bidding rules for the anchor investors in IPO:
- Anchor investors need to apply for listed IPOs under the anchor quota.
- Anchor investors must wait to sell their shares before completing 30 days of allotment. Those who want to exit the IPO during the listing period are advised not to take the anchor route.
- Anchor investment is done a day before the launch of an IPO.
- Anchor investors can apply up to the maximum number of shares listed under the anchor category.
- Anchor investors can apply for up to ₹1 crore in SME IPO and ₹10 crore in the mainboard IPO listing.
- An anchor investor can neither modify nor withdraw a bid after placing it.
- No family members, merchant bankers, relatives, or promoters can apply as anchor investors in the company’s upcoming or current IPO.
- An anchor investor must pay the total bid amount when filing the IPO application.
Final Words
Anchor investors, as we’ve discussed, are key players in the IPO process. They provide the firm with the necessary stability and attract new investors. One of their significant roles is in stabilizing stock prices. By demonstrating trust in the company’s growth potential, they create a demand that leads to better prices for the upcoming IPO. This is a crucial aspect of their function that investors should be aware of. Additionally, anchor investors enjoy the opportunity to buy bulk shares at discounted prices, which they can later sell for significant returns.
But just like any other investment, investing in the stock market has some risks. Hence, it is highly advised to consult a stock market advisory firm before investing in the current or upcoming IPOs. This step can provide you with the reassurance you need to make informed investment decisions.
What are the benefits of becoming an anchor investor?
The anchor investors benefit from the discounted price of stocks and their investments' favorable terms and conditions.
What is the difference between anchor investors and angel investors?
Anchor investors are the initial investors who provide the initial funding for a fresh investment instrument.
They aim to enhance the credibility of the firm they are investing in.
On the other hand, angel investors offer their personal funds, expertise, and mentorship to an early-stage company or startup.Who can become an anchor investor in IPOs?
Anchor investors in IPOs are mostly institutional entities such as banks, insurance firms, mutual funds, etc. They aim to instill confidence among other investors.
I’m Archana R. Chettiar, an experienced content creator with
an affinity for writing on personal finance and other financial content. I
love to write on equity investing, retirement, managing money, and more.