The Role of Anchor Investors in IPO Pricing

Anchor investors participate in India’s IPO framework through a regulated pre-issue allocation mechanism available exclusively to Qualified Institutional Buyers (QIBs). Their placement occurs before public subscription opens and forms part of the institutional book-building process governed by the Securities and Exchange Board of India (SEBI).

Anchor investors are QIBs permitted to subscribe to shares in an IPO during a designated pre-issue window. Eligible entities include SEBI-registered mutual funds, eligible foreign portfolio investors (FPIs), insurance companies, banks, and financial institutions.

They are allotted shares at the final offer price determined through the book-building process. Details of their participation, including names, quantities allotted, and price, are disclosed in the Red Herring Prospectus (RHP) and stock exchange filings.

IPO subscriptions in India are categorised into three primary groups:

• Qualified Institutional Buyers (QIBs)
  

• Non-Institutional Investors (NIIs)
  

• Retail Individual Investors (RIIs)
  
  

Anchor investors fall exclusively within the QIB category and participate before the public bidding phase.

Anchor allocation takes place one working day before the IPO opens for public bidding. During this stage:

• Eligible QIBs submit bids within the price band
  

• Allocation is finalised at the discovered offer price
  

• Allotment details are disclosed through exchange filings and the RHP
  

This allocation is completed before retail and non-institutional bidding begins.

Their early capital commitment can influence the upper end of the IPO price band and sometimes, they even influence final allocation decisions. Anchor investors indirectly shape IPO pricing in the following ways

• Validation of Price Band: If multiple anchor investors agree to invest at the upper end of the price band, it reinforces market confidence in the valuation

• Oversubscription Trends: Their presence often triggers higher participation across retail and institutional categories

• Pricing Strategy for Issuers: A strong anchor book allows issuers to confidently price the IPO near the top of the price band.
   

While they don’t dictate pricing directly, anchor investors in IPOs have a significant signalling effect in the IPO price listing process.

SEBI has updated the anchor investor framework to refine allocation limits and broaden institutional participation. Under the current rules:

• Anchor allocation is capped at 40% of the total issue size, split as:

  • 33% reserved for mutual funds

  • 7% reserved for insurance companies and pension funds
    

• Each anchor investor must invest a minimum of ₹5 crore
  

• Anchor allocation is completed one working day before the IPO opens for public subscription
  

• The number of anchor investors permitted continues to vary based on issue size
  

• Names of anchor investors, shares allotted, and offer price must be disclosed through stock exchange filings and the Red Herring Prospectus
   

These provisions form part of SEBI’s revised primary market framework governing institutional participation in IPOs.

Anchor bids contribute to the institutional demand book used during book building. While anchor investors do not independently determine the IPO price, their participation forms part of the aggregate demand considered when finalising the offer price within the declared price band.

For IPOs launched on or after April 1, 2022:

• 50% of the shares allotted to anchor investors are subject to a 30-day lock-in period
  

• The remaining 50% are subject to a 90-day lock-in period
  
  

The lock-in applies from the date of allotment.

Anchor participation details are published in Draft and Red Herring Prospectuses filed with stock exchanges such as the National Stock Exchange of India and BSE Limited. These disclosures include the names of participating institutions, number of shares allotted, and the issue price.

Anchor investors operate within a defined regulatory structure as part of India’s book-built IPO mechanism. Their participation occurs during the pre-issue stage, contributes to institutional demand formation, and is subject to prescribed disclosure and lock-in requirements. Together, these elements form part of the operational framework governing primary market offerings in India.

This content is for informational purposes only and the same should not be construed as investment advice. Bajaj Finserv Direct Limited shall not be liable or responsible for any investment decision that you may take based on this content.