Anchor Investors in IPOs: Role, Benefits, and Impact on Pricing

Anchor investors play a pivotal role in the success of an Initial Public Offering (IPO) by committing to purchase a substantial portion of shares before the IPO opens to the public. Their early participation signals confidence in the issuing company’s prospects and contributes to price stability during listing. This, in turn, benefits the company by enhancing credibility and provides reassurance to retail investors.

This article delves into who anchor investors are, their functions and advantages, as well as how their presence influences IPO pricing and market perception.

Anchor investors usually consist of major institutional players like mutual funds, insurance firms, foreign portfolio investors (FPIs), pension funds, and sovereign wealth funds. These investors agree to purchase a substantial portion of the IPO, commonly around 10% or more, prior to the opening of the public subscription.

They receive shares at the IPO’s offer price and are required to hold onto these shares for a compulsory lock-in period, typically lasting 30 days from the listing date. This arrangement provides assurance to the market that a portion of the shares will remain locked, helping to maintain stability in the stock price after the IPO launch.

Anchor investors play a crucial role in setting the tone for an IPO and influencing broader market participation:

Providing Confidence to the Market

The involvement of well-known and reputed institutional investors is often viewed as an endorsement of the company’s fundamentals and growth potential. This confidence encourages participation from retail investors and other institutions, helping to boost subscription levels.

Price Stabilisation

By buying shares ahead of the public offering, anchor investors create initial demand that supports the IPO price. Their lock-in agreement helps prevent sudden sell-offs post-listing, reducing price volatility and smoothing out listing-day fluctuations.

Enhancing IPO Credibility

Anchor participation signals to the market that professional investors have conducted thorough due diligence and have faith in the company’s future. This improves the overall credibility and attractiveness of the IPO, often leading to better demand from other investor segments.

Facilitating Fundraising

Anchor investors often subscribe to a sizeable portion of the IPO, which guarantees the issuing company a substantial amount of capital upfront. This reduces the risk of undersubscription and helps ensure successful capital mobilisation.

Anchor investors offer strategic advantages during the IPO process:

• Faster Capital Mobilisation: Early commitment from anchor investors ensures that a significant portion of funds is raised even before the public subscription begins.
  

• Reduced Undersubscription Risk: The assured demand from anchors lowers the possibility of the IPO being undersubscribed, which can adversely impact pricing and listing performance.
  

• Better Price Discovery: Anchor bidding helps establish a realistic benchmark price for the IPO by reflecting true institutional demand.
  

• Enhanced Market Reputation: Association with reputed anchor investors adds prestige and credibility, attracting more investors and media attention.

Anchor investor involvement often shapes broader market perception and pricing trends:

• Assurance of Demand and Stability: Knowing that anchor investors have committed significant funds reassures smaller investors about the IPO’s quality and demand prospects.
  

• Reduced Listing Volatility: The lock-in period prevents immediate selling pressure from anchor shares, leading to smoother price movements post-listing.
  

• Indicator of IPO Quality: Retail investors often interpret anchor participation as a positive signal and may base their investment decisions accordingly.

Anchor investor activity directly influences IPO pricing and investor sentiment:

• Price Benchmarking: The price at which anchors subscribe often sets a reference point for retail and institutional bids, influencing final pricing decisions.
  

• Subscription Levels: Large anchor participation can generate momentum and higher subscription rates from other investors.
  

• Lock-in Support: The mandatory lock-in reduces the risk of immediate share dumping, which stabilises prices in the early post-listing phase.

Here are SEBI’s key rules that govern them:

• Minimum Allocation: At least 10% of the IPO offer size is mandated to be allocated to anchor investors.
  

• Eligibility: Only institutional investors registered with SEBI qualify as anchors.
  

• Lock-in Period: Anchor investors must hold their allotted shares for 30 days from the date of allotment, during which they cannot sell.
  

• Disclosure: The identities and allocation details of anchor investors must be publicly disclosed before the IPO opens for subscription, promoting transparency.

Anchor investors contribute significantly to the success and stability of IPOs by providing early demand, aiding price discovery, and enhancing market confidence. Their participation benefits companies, investors, and the broader market ecosystem by supporting smoother capital raising and listing processes.

Understanding their role helps investors interpret IPO signals better and make more informed participation decisions.

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.