The Role of Anchor Investors in IPO Pricing

Anchor investors play a pivotal role in the financial market, particularly in the Initial Public Offering (IPO) ecosystem. They are institutional investors invited to subscribe to shares before the IPO opens to the public. 

The involvement of anchor investors in IPO provides confidence and trust and has a positive impact on investor sentiment and offer pricing. Understanding who anchor investors are and their impact on IPO subscription figures and pricing dynamics will help you facilitate effective investment decisions.

Anchor investors in IPO are qualified institutional buyers who invest in an IPO before it opens for public subscription. They are large institutional investors, including mutual funds, insurance companies, pension funds, and sovereign wealth funds. Their defining feature is early commitment. 

They subscribe to shares before the IPO is open to the public at a predetermined price. Only Qualified Institutional Buyers (QIBs), as defined by the Securities and Exchange Board of India (SEBI), can act as anchor investors. 

They include:

• Mutual funds registered with SEBI

• Foreign Portfolio Investors (FPIs) meeting specific criteria

• Insurance companies registered with the Insurance Regulatory and Development Authority of India (IRDAI)

• Banks and financial institutions
  

Their early participation signals that a company has undergone due diligence and passed certain institutional benchmarks.

Here’s an easy way to understand the meaning of anchor investors using an example:

Imagine a company that plans to offer 20,000 shares in the market through an IPO. Before the shares are available to the public, the company sells a large portion of these shares to anchor investors like mutual funds and banks. 

The shares are generally available to them at the offer price determined through the book-building process. Say: 

• The company sells 4,000 shares to mutual funds

• It sells 3,000 shares to banks
  

When the company goes public, 13,000 shares remain available for the public to buy. Since well-known investors, such as mutual funds and banks, have already invested, this builds trust and credibility among retail investors. Their support helps attract more investors and can lead to a higher share price.

Anchor investors in IPO serve multiple roles that influence the IPO process:

• Market Confidence: Anchor investors in an IPO signal institutional trust in the company’s business model, governance, and valuation

• Price Discovery: Their early agreement and large amount of bidding in an IPO helps with price discovery and increases the interest of other investors

• Demand Creation: Their presence often encourages retail and non-institutional investors to subscribe to the IPO

• Brand Value: Participation by high-profile anchors lends prestige to the offering, improving perception

• Provide Stability: After investing in an IPO, they agree to hold onto the shares for a specific period, which reduces the pressure on retail investors

SEBI has laid down specific rules to ensure transparency and fair conduct of anchor investors. It governs the functioning of anchor investors through strict regulations:

• Eligibility: Only QIBs can be anchor investors

• Minimum Investment: ₹10 Crores in mainboard IPOs

• Timeline: Anchor allocation occurs one working day prior to the IPO opening for public subscription

• Allocation Limit: 

  • For IPOs with anchor investments up to ₹10 Crores, two or more anchor investors can participate

  • If the investment exceeds ₹10 Crores but is less than ₹250 Crores, up to 15 anchor investors can be involved, provided each invests at least ₹5 Crores

  • If the issue size is over ₹250 crores, the limit of anchor investors increases to 25

• Lock-in Period:

  • 50% of anchor shares have a 90-day lock-in period

  • The remaining 50% are locked in for 30 days

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.

To ensure market stability and avoid sudden selling right after listing, SEBI has set a lock-in period for them. For IPOs launched on or after April 1, 2022, 50% of the shares allotted to anchor investors must be held for at least 30 days, and the remaining 50% must be held for 90 days from the date of allotment. This means they cannot sell these shares during that time. The rule helps reduce price volatility and builds confidence for retail investors, as it shows that big investors are committed for the short to medium term.

The presence of anchor investors serves a valuable purpose in both primary and secondary Indian markets. Their participation can affect pricing indirectly by validating the valuation and influencing broader investor sentiment. 

Their investment helps to stabilise the IPO and acts as a shield for new investors who want to invest for the first time. However, it’s ideal to conduct independent research, even when anchor interest appears high.

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.