Understanding the Role of an Anchor Investor in IPOs

Anchor Investor in IPO, Anchor Investor meaning

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Anchor investors play an important role in any company’s life cycle. Particularly for start-up companies the role of an anchor investor is most important. Again, during the Initial Public Offering (IPO) process, anchor investors can significantly influence the valuation of the company. In this article, we uncover a framework where anchor investors purchase substantial shares at the IPO stage that gives confidence about the company in the stock market.

The strategic involvement of anchor investors before the IPO launch not only mitigates risks about the IPO investment to a certain level but also brings confidence about the company’s fundamentals.

Anchor Investor Meaning

Anchor investors are those who invest in the company during the pre-IPO process, and IPO process as well during the post-IPO period. This investment gives stability to the share price of the company. Hence, a breakdown of their key role in the market is essential.

  • Registration and Compliance: Anchor investors, such as GQG PARTNERS, RELIANCE TRUST, etc. are registered with market regulator SEBI and comply with SEBI regulations, ensuring a secure and transparent investment environment. For example, recently, 4,90,90,90,908 Equity Shares of Vodafone Idea FPO is allocated to Anchor Investors at an Anchor Investor allocation price of Rs. 11/- per Equity Share. A notification is issued in BSE and NSE about that.
  • Investment and Allocation
    • Anchor investors are institutional buyers, committing to purchase shares at a fixed price before the IPO opens to the public, which helps in setting a benchmark price for the IPO.
    • They are allotted up to 35% of the shares reserved for Qualified Institutional Buyers (QIBs) and have specific lock-in periods to prevent immediate offloading of shares that help to make a stable investment outlook.
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The Role of Anchor Investor in IPO

Anchor investors play a crucial role in the Initial Public Offering (IPO) process, providing stability, confidence, and credibility to both the company going public and potential investors.

  1. Pre-IPO Commitment and Price Discovery
    • Anchor investors subscribe to pre-IPO shares at a fixed price before the IPO is open to the public. This helps investors in the price discovery process.
    • Again, during the IPO process, anchor investors participate in IPO bidding one day before the issue starts, with their bids being irrevocable, showcasing their commitment and confidence in the company. Looking at the subscription of anchor investors (QIB), retail investors can have confidence about the pricing of the IPO.
  2. Anchor investor IPO lock in period
    • A minimum investment of ₹10 crores is required from each anchor investor, which signifies a substantial financial commitment to the IPO.
    • Shares bought by anchor investors are subject to a lock-in period, with 50% of the shares locked for 30 days and the remaining 50% for 90 days. This prevents immediate sell-off, contributing to post-IPO price stability.
  3. Imapact of Anchor investor IPO on Market Perception and Investor Confidence
    • The presence of anchor investors can significantly enhance retail investors’ confidence, as it indicates strong demand and credibility of the IPO shares offered.

Recent success stories like Bharti Hexacom IPO and IREDA IPO highlight the positive impact of anchor investor in IPO process. That reflects how their early commitment can create a buzz among retail investors in promoting confidence and contributing to the overall success of the IPO.

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Regulatory Framework Anchor Investor in IPO

To ensure market stability and increase investor confidence, the market regulator designs rules or regulatory frameworks surrounding anchor investors. A few regulations that you need to understand the get the benefit out of anchor investment in the IPO process are as below.

  1. Anchor Investor Lock in Period and Share Allocation:
    • Anchor investors are mandated to hold their shares for 30 days post-IPO allotment, with the ability to sell half after this period, and the remainder shares can only be sold after 90 days.
    • The total allocation for anchor investors is capped at 60% of the QIB reservation and 30% of the total issue size for IPOs, ensuring a balanced distribution.
  2. Bidding and Allocation Rules:
    • Once bids are placed by anchor investors, these cannot be withdrawn or modified, establishing a commitment to the IPO.
    • Allocation to anchor investors is completed on the same bid submission date, streamlining the process.
  3. Restrictions and Qualifications:
    • Family members, relatives, merchant bankers, or promoters are prohibited from applying for shares under the anchor investor category, preventing conflicts of interest.
    • Anchor investors must invest a minimum of Rs 10 crore, signifying a significant financial commitment to the IPO.

These regulations, including the lock-up period, allocation limits, and stringent qualifications for anchor investors, are very important in maintaining stability and confidence in the market post-IPO.

Anchor investor in IPO

Examples of Anchor Investor in IPO

IPOsAnchor investor IPO DateAnchor investor IPO Price (INR)Download Anchor Investor IPO doc.
Vodafone Idea17-04-202411Download
Bharti Hexacom02-04-2024570Download

Final words on Anchor investor IPO

Anchor investors are most important for the success of an Initial Public Offering. These investors are not only adding substantial value through financial commitments but also enhancing credibility, stability, and investor confidence in the market. That is the reason, promoters of the company choose anchor investors with a lot of scrutiny.

Recent success stories such as Bharti Hexacom IPO and IREDA IPO prove the importance of anchor investors during both the Pre IPO as well as post IPO period.

While investment from anchor investors gives confidence to the market particularly retail investors about the company IPO, it is also important to the retail investors to do proper due diligence before investing in any IPO.

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Frequently Asked Questions

What is the Role of Anchor Investors in Initial Public Offerings (IPOs)?

Anchor investors play a crucial role in IPOs by subscribing to a pre-defined portion of shares of the company at a predetermined price before the IPO is opened to the public. This early investment, which must be a minimum of Rs. 10 crores, boosts confidence among retail investors and enhances the demand for the shares.

How Do Cornerstone Investors Differ from Anchor Investors?

Cornerstone investors commit to purchasing a significant portion of a share offering before the start of a book build and agree to have their names disclosed. In contrast, anchor investors typically participate during a book build for a substantial share of the deal, but their names are not usually disclosed. However, just before the IPO opening day, exchanges notify the name of the anchor investors to the public.

Anchor Investors vs. Seed Investors

Seed investors invest during the early stages of the company. They are usually involved in the management of the company. Anchor investors participate directly in the IPOs without such involvement in the management of the company’s broader financial interests.

Who are Anchor Investors?

Anchor investors are institutional investors, such as Mutual Funds (MFs), Foreign Portfolio Investors (FPIs), and Insurance Companies, who commit to purchasing shares in an IPO before it is available to the general public.

Anchor Investor vs QIB

QIB are qualified Institutional investor that can play the role of anchor investors.

What is Anchor investor lock in period

Anchor investors are mandated to hold their shares for 30 days post-IPO allotment, with the ability to sell half after this period, and the remainder shares can only be sold after 90 days.

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