An Initial Public Offering (IPO) is an excellent way for investors to boost their financial portfolio. Not only does it help them meet long-term goals, but it also generates profits within a short duration. With better price transparency, you can purchase them at cheaper rates.
Many investors are drawn toward them as these investment avenues provide high returns. There are many categories of investors that can invest in IPOs. Read on to know more about the different types of investors in an IPO.
There are several types of investors in an IPO, and each type needs to adhere to a different set of rules. Here are the types:
Retail investors are the most common type of investors in IPOs. Here are some essential characteristics of these investors:
These are small individual investors willing to buy shares in an IPO worth not more than ₹2 Lakhs
This category includes individual Indian residents, Non-Resident Indians (NRIs), and Hindu Undivided Families (HUFs)
The Securities and Exchange Board of India (SEBI) has mandated reserving 35% of the shares for retail individual investors
As an RII, you stand a chance to be a part of an organisation with better prospects right from the start
You can also accumulate a huge corpus with good returns over time
Non-Institutional Investors (NIIs) are individual investors that invest more than ₹2 Lakhs in an IPO. Here are some features you must be aware of:
This category includes High Net-worth Individuals (HNIs) as well as individual companies, trusts, and organisations
High Net-worth Individuals invest more than ₹2 Lakhs in an IPO and have net invested assets of more than ₹2 Crores
As per the SEBI regulations, companies listing their IPOs in the primary market must reserve 15% of the shares for such investors
These investors need not register with SEBI and get the privilege of withdrawing from an IPO before its allotment date
Commercial banks, Asset Management Companies (AMCs), Public Financial Institutions (PFIs), and Foreign Portfolio Investors (FPIs) fall under the QII category. Check out some essential attributes of these investors:
These investors park huge sums of money in IPOs and stay invested for a long-term horizon
The purchase of shares by such an IPO investor can have a significant bearing on its issue price
Institutional investors make investments in IPO through pension funds, insurance companies, and mutual funds
As per the SEBI norms, 50% of the allotment of shares will be reserved for Qualified Institutional Investors
These investors can buy large stakes in a company and can sell the stocks once the 90-day lock-in duration is complete
An anchor investor is a sub-category under QIIs, launched by SEBI in 2009. Here are some essential characteristics of these investors:
It allows investors to invest more than ₹10 Crores through a book-building process
Regarding IPO investments, it is essential to note that no one-size-fits-all approach exists. Hence, each type of investor needs to assess their financial goals before deciding which IPO to invest in.
Moreover, to increase your chances of allotment of IPO units, you need to have a profound knowledge of each type of investor in the IPO. Note that it is not necessary to invest in every IPO, so assessing the company’s financial health is essential before investing in an offering.
Anchor investors are part of the Qualified Institutional Investors (QIIs) for IPOs through a book-building approach with an investment value of ₹10 Crores. This sub-category was introduced by the SEBI in 2009. Out of the total shares reserved for QIIs, companies need to keep aside at least 60% of them for anchor investors.
Individual investors are retail or non-professional investors that buy IPO through a stock broker or banks. These investors typically purchase offerings in small quantities because they have fewer resources than institutional investors.
On the other hand, institutional investors are companies and organisations that pool money from various small investors to invest in an IPO. These include pension funds, insurance companies, hedge funds, and investment banks.
High Net-worth Individual (HNI) individuals are not different from Non-Institutional Investors (NIIs) but are a part of the subset. High net-worth individuals are those investors that invest over ₹2 Lakhs in an IPO and have a total net asset worth over ₹2 Crores.
On the other hand, unlike HNIs, NIIs also include individual institutions like large trusts, firms, and other institutions.
SEBI has mandated companies to reserve up to 35% of the shares in an IPO for retail investors.