Understanding Anchor Investors in IPOs: Why They Matter

When a company goes public, not just retail investors rush to apply for shares. Institutional Investors also play a big role in shaping IPO success. Anchor investors are such investors who invest in an IPO before the IPO opens to everyone else, giving the market a strong signal. Understanding who anchor investors are, why they matter and how their presence affects investors’ confidence. Let’s break it down.

Who Are Anchor Investors?

Anchor investors are large, qualified institutional buyers who invest in a company’s IPO before it opens to the public. Their early commitment of a minimum of ₹10cr funds helps build confidence in the IPO and attracts other investors.

SEBI introduced anchor investors in 2009, allowing them to take up to 60% of the portion reserved for Qualified Institutional Buyers (QIBs). They must invest at least ₹10 crore in a mainboard IPO or ₹2 crore in an SME IPO, with a mandatory lock in period. If the final book-building price is higher than their allotment price, they pay the difference, if it is lower, no refund is provided. Shares are allotted to anchor investors one day before the IPO opens for retail investors.

Role of Anchor Investors in an IPO

Anchor investors play several key roles in an IPO, such as:

• Credibility and Confidence: A key role of anchor investors is building market confidence. When reputed funds or global investors back an IPO, it reassures retail investors, boosts credibility and can drive higher subscriptions and in some cases listing price.
• Generate early demand: By subscribing to shares one day before the public offering begins, anchor investors create initial demand and momentum for the IPO.
• Price Stability: Anchor investors usually hold the shares for a fixed lock-in period (generally 30 days). This reduces the risk of immediate selling pressure after listing, which can otherwise lead to sharp price fluctuations.
• Market Perception: Participation of reputed institutions builds a positive perception. Media often highlights anchor investors’ names, adding both hype and credibility to the IPO.
• Assist in price discovery: Anchor investors conduct thorough due diligence before investing. Their bids, usually at the higher end of the price band, help set a fair and credible IPO valuation.

Why Anchor Investors Matter

Anchor investor’s presence affects the IPO in multiple ways:

• Retail investors often take cues from institutional participation. When reputed funds come in as anchors, it signals trust and encourages more retail applications.
• With a lock-in period in place, anchor investors cannot exit immediately. This reduces extreme price swings on listing day and ensures a smoother debut for the stock.
• Anchor investors carefully evaluate a company and their involvement signals confidence in its fundamentals, growth and management.
• Having renowned institutions on board boosts the company’s reputation and signals alignment with trusted names, benefiting the brand beyond the listing.

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Lock-in period for Anchor Investors

In India, anchor investors are required to follow a lock-in period before selling their IPO shares. Earlier, they had to hold all their shares for 30 days from the date of allotment. But from 1 April 2022, SEBI changed the rule. Now, anchor investors can sell up to 50% of their shares after 30 days while remaining shares can only be sold after 90days.

Impact of Anchor Investor on Market Confidence

Here is how anchor investor’s investments can impact market confidence:

• Visibility: Their involvement gets highlighted in media, sending a strong signal that the company has credible backing.
• Momentum: When anchor portion is fully subscribed or oversubscribed, it creates buzz and motivates HNIs & retail investors to participate.
• Stability: Since anchor investors are required to hold their shares for at least 30 days and in some cases, 90 days for part of their allocation, it reduces the chances of an immediate sell off if the market turns volatile after listing.

This lock in period plays an important role in keeping the IPO steady during its initial phase, offering much-needed reassurance to both the company and other investors.

FAQs

• Who qualifies as an anchor investor in an IPO? 
  Anchor investors are large institutional players like mutual funds, insurance companies and pension funds, invited to subscribe to IPO shares ahead of the public.
• Why is anchor investor participation important for retail investors? 
  For retail investors, anchor participation signals credibility. It shows strong fundamentals and lowers the perceived risk of investing in the IPO.
• Is the anchor investor’s investment locked in? 
  Anchor investors can’t sell all their shares right away. 50% of their holding is locked in for 30 days, while the other 50% stays locked for 90 days.