Anchor Investors in IPOs – Meaning, Role & Benefits

Have you ever wondered who the influential investors are that step in to support a company’s initial public offering (IPO)? Known as anchor investors, these key players are essential for the success of any public offering.

In this blog, we will give information about anchor investors in Initial Public Offerings (IPOs), examining how their participation impacts share pricing and demand. We will also highlight the advantages they offer to companies and the overall market.

What is the meaning of Anchor Investor?

An anchor investor is a qualified institutional buyer (QIB) who invests at least INR 10 crores or more in a mainboard IPO or INR 1 crore in an SME IPO. Securities and Exchange Board of India (SEBI) introduced the concept of Anchor investors in 2009.

These investors boost credibility and attract interest in an IPO by investing a large amount early because anchor investors are well-established institutions like mutual funds, pension funds, etc. Their involvement can stabilise prices, boost demand, and lessen volatility.

Why do companies need Anchor Investors?

Companies require anchor investors for the following reasons:

• Enhance Credibility and Confidence: As mentioned above, anchor investors consist of reputable financial institutions whose participation is a strong endorsement of the company. When these investors commit to buying shares, it instils confidence in other investors, making the IPO an attractive investment opportunity.
• Create Demand & Price Stability: Anchor investors buying a large stake upfront helps establish a stable price floor for the stock. It lowers the risk of price volatility when the stock begins trading because these investors own a substantial portion of the shares.
• Attract Retail Investors: Investments by anchor investors make the IPO popular, which encourages smaller retail investors to invest.
• Reducing Underwriting Costs and Risks: Pre-allocating some shares makes it easier and cheaper for companies to sell the rest. Anchor investors reduce the risk of unsold shares, making the IPO process more efficient and cost-effective.
• Ensuring Long-term Commitment: Anchor Investors commit to a lock-in period, during which they are prohibited from selling their shares for a specified duration following the IPO. This guarantees that a segment of shares stays with investors who are invested based on a long-term outlook, thus increasing stability during the crucial early post-listing phase.

Importance of Anchor Investors

Anchor investors are important for the financial market due to the following reasons:

• Strong Financial Base: By investing substantial capital upfront, anchor investors create a financial cushion that enables companies to achieve their fundraising objectives.
• Enhanced Reputation: Securing investments from esteemed investors enhances the company’s reputation in the market. Their involvement highlights the company’s growth potential, thus increasing its attractiveness among other investors.
• Reduced Volatility Post-IPO: The commitment to a lock-in period effectively narrows price fluctuations in the initial trading phase, resulting in a more stable stock price.
• Positive Market Perception: Anchor Investors boost positive sentiment for the IPO, often resulting in oversubscription. This optimistic outlook can ultimately benefit the stakeholders involved.

How Do Anchor Investors Operate?

The company issuing the IPO selects anchor investors based on their financial strength, reputation and compatibility with its vision. Anchor investors receive a significant allocation of IPO shares, generally around 30% of the total offering or 60% of the total QIB quota. These investors pledge substantial investments, providing a reliable financial foundation for the offering. Let’s understand how anchor investors operate.

1. The company unveils a price range for the IPO, which is the basis for determining the final price.
2. Anchor investors submit their bids at a fixed price, indicating the quantity of shares they wish to acquire and must pay the entire amount at the time of application. Anchor investors can place bids one day before the issue opens to the general public.
3. Shares are allocated to anchor investors one day before the IPO opens for the general public. The final offer price is determined through the book-building process.
4. They commit to staying invested for 30 days for 50% of the shares, and the rest of the shares must be held for 90 days after the allotment date. This period is often referred to as the lock-in period.
5. The lock-in period decreases the chances of immediate sell-offs, fostering price stability for the stock during its initial post-IPO trading phase.

Once the lock-in period is over, anchor investors can sell their shares either on the open market or through alternative methods.

Things to know about Anchor Investors

Some important facts about the Anchor investors are:

1. For anchor investors, the minimum bid amount is INR 10 crore. 
2. One-third of the Anchor Investor Portion will be reserved for domestic mutual funds, provided they submit valid bids at or above the valid price.
3. Anchor Investors must submit their bids exclusively through one of the Book Running Lead Managers (BRLMs) associated with the offering.
4. Bidders and applicants seeking information based on the allotment for Anchor Investors can review the RHP or the prospectus.
5. The price at which equity shares are allocated to anchor investors will be decided by the company after consulting the BRLMs.

Allocation to anchor investors is discretionary and subject to the following conditions:

1. For allocation up to INR 10 crores, a maximum of two anchor investors is allowed.
2. For allocations between INR 10 crores and INR 250 crores, a minimum of 2 and a maximum of 15 anchor investors are allowed, with a minimum investment of INR 5 crore per investor.

Lock-in period for Anchor Investors

In India, the lock-in period for anchor investors is structured as follows:

1. Anchor Investors cannot sell 50% of the shares for 30 days starting from the date of allotment. 
2. The remaining 50% of the shares will be locked in for 90 days starting from the date of allotment.

Furthermore, the staggered lock-in period facilitates the gradual selling of shares, minimising the risk of volatile price fluctuations that could arise from large-scale sell-offs by anchor investors right after the listing date.

Anchor Investor’s Reservation in IPO

Additionally, anchor investors in an IPO represent a specific group of Qualified Institutional Buyers (QIBs) who are allocated a share of the total issue size during the IPO. These investors can reserve a maximum of 30% of the total IPO size and 60% of the QIBs’ quota. One-third of the allocation for anchor investors is designated for domestic investment funds.

Conclusion

In summary, anchor investors play an important role in the IPO process. Their early commitment and reputation create a strong foundation for a successful IPO, reassuring investors about the company’s potential. Anchor investors help improve stock performance by driving demand, stabilising prices, and establishing credibility. In today’s evolving market, having trustworthy anchor investors is not merely beneficial; it is essential for companies aiming for a solid debut on the stock exchange.

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