The concept of an anchor investor was introduced by the regulatory authority (SEBI) in 2009. All companies, before the IPO is listed, go through an exhaustive process for choosing their anchor investors. The main purpose of these investors is to create some buzz around the IPO and lend their credibility to the issue. These investors are also referred to as cornerstone investors in a few global markets, signifying their importance to the company.
Before moving further, let us understand the anchor investor meaning, and why the term was coined in the first place. In 2009, SEBI first proposed this concept, allowing investors to subscribe up to 30% of the quota for institutional investors in an IPO. As per the concept, a company can select a strategic investor who can subscribe to 30% of the quota reserved for a qualified institutional buyer (QIB), translating to 18% of the total issue. There is a caveat here: the anchor investor cannot offload the allotted shares before the completion of 30 days.
This idea was proposed and approved for one simple reason. This investor, taking charge, would quote what it would be willing to pay for the company’s shares. This gives the other investors subscribing to the IPO a better idea as to what they can quote. Because of this reason, any company that is reputable can command a higher premium than an entity with low corporate governance standards.
Thus, the role of an anchor investor in an IPO is critical. Before the IPO is opened for subscription, this investor functions as an ‘anchor’ and subscribes to shares at a fixed price to instil confidence in the retail investors, thereby improving the share’s demand. Moreover, the anchor investor has to invest at least Rs. 10 crores in the issue.
To provide some context, in FY21, the IPO market witnessed the highest-ever funds raised in the primary market. However, as per reports, 76% of the stocks suffered when the anchor investors’ lock-in periods expired in CY2021, with an average price correction of 2.6% on the day of sale.
This led to the regulatory authority (SEBI) ringing in some changes through revised regulations. While the lock-in period of 30 days was inserted to avoid significant market volatility in the event that anchor investors offloaded their holdings to make listing gains, when they did sell their stake in the open market, it led to massive slumps in the company’s share prices. As per the new regulations, anchor investors can only offload half their stake after the expiration of the 30 day lock-in period. They can sell the remaining half only after 90 days.
Thus, these are among the core investors of any IPO, and their investment is vital in increasing the confidence of retail investors. Similar to companies doing their due diligence before bringing in an anchor investor, these investors also perform thorough analyses of the companies and the IPOs, resulting in their practical approach. While this answers the question, ‘Who is an anchor investor?’, let us look at some of the rules and regulations in place for such investors and the key highlights.
Key highlights of anchor investors
As per SEBI(ICDR) Regulations 2018, the anchor investors' investment is contingent upon meeting specific conditions.
- These investors must make a minimum investment of Rs. 10 crores in the Initial Public Offering.
- MFs have a reservation of 1/3rd of the portion in the anchor investor category.
- These investors are allocated 30% of the aggregate IPO.
- Such investors also have a reservation of up to 60% of the issue size among the Qualified Institutional Buyers (QIB) category.
- Anchor investors receive the proposal to invest in an IPO and get a confirmed allotment a day prior to the IPO opening for public subscription.
- Anchor investors must adhere to the lock-in period of 30 days. During this period, they will not be able to offload their holdings.
- After the lock-in period, they can sell half of their holdings, while the remaining portion can be offloaded after 90 days.
- Provided the offer size falls below Rs. 250 crores, a maximum of 15 such investors are required. If the offer size exceeds Rs. 250 crores, the number of anchor investors can go up to 25.
- Anchor investors are allotted shares at a fixed price, which falls within the price band. During the book-building process, if it is determined that the share price is higher, these investors must pay the difference. Conversely, if it is determined that the share price is lower, the investors will receive this difference.
How does SEBI view anchor investors?
Anchor investors, as per SEBI, have the following roles:
- Regulation
There are specific guidelines set by SEBI that hold anchor investors responsible and promote fairness and transparency in the initial public offering process. - Lock-in period
There is a lock-in period of 30 days concerning the shares allocated to anchor investors, mandated by SEBI. - Disclosure
It is also a requirement for businesses to disclose details of anchor investors and the exact amount of allocated shares before the initial public offering goes live for the public. - Stability
According to SEBI, anchor investors work as stabilisers in the entire IPO process as they aid in managing the process’s volatility. Anchor investors are also vital in assisting the market entry through IPO.
Difference between anchor investors and QIBs
Here are some of the key distinctions between a qualified institutional buyer (QIB) and an anchor investor:
Anchor Investor |
Qualified Institutional Buyer |
Invited to join before the initial public offering is opened for the public |
They join in during the subscription period of the IPO |
A lock-in period is mandatorily applied to them |
There is no such mandatory lock-in |
It is mandatory to disclose their participation before the initial public offering opens. |
Their participation can be disclosed after the IPO opening. |
They lend stability and credibility to the initial public offering. |
Even though they do not help stabilise the IPO, they significantly contribute towards the total subscription. |
Things to know about anchor investors
With the meaning and role of anchor investors clarified, let us take a look at a few key things you must know about anchor investors:
- Credibility
Anchor investors significantly add to credibility and transparency in the IPO process. As these are typically institutional investors who are reputed and well-established, like insurance companies, mutual funds, etc., they conduct thorough due diligence and analysis before investing. Their participation in the IPO is considered a positive sign and attracts other investors. - Minimum investment
As certain minimum investment criteria has to be met by all anchor investors, only the seasoned and serious investors make it through the process. While the minimum investment amounts are typically quite high, anchor investors tend to bank heavily on the IPO’s success in line with company and retail investor expectations and interests. - Lock-in period
There is a mandatory 30-day lock-in period for all anchor investors after shares are allotted to them. This is implemented to prevent selling right after the IPO and enhance performance and price stability. It also reduces price fluctuations as a result of early profit booking. - Transparency
The specific details of the investments that anchor investors make in an IPO are disclosed before the IPO goes live for ordinary investors. This is critical for retail and other investors as they can have this information before investing. If some reputable anchor investors join in, it also provides confidence to others. The information that is disclosed typically comprises the names of anchor investors and the amount of shares allotted to them. - Impact
If popular and trustworthy anchor investors participate in an IPO, it directly impacts its success. This is because they enhance the subscription rates and the share demand in the process. As retail investors flock to these IPOs with confidence, it often leads to oversubscription, better pricing, and an increased number of successful market entries on the part of firms.
Lock-in period for anchor investors
One of the key features of the anchor investment framework is the mandatory lock-in period. Let us understand a little bit more about the various features of this regulation:
- Duration
Anchor investors have to comply with a mandatory minimum lock-in period of 30 days after IPO shares are allotted. This is a step towards ensuring stability in the IPO price. - Purpose
The main objective of this feature is to promote long-term commitment among investors. As anchor investors cannot sell immediately after the IPO goes live and book profits, retail investors can be assured of stable pricing in the short term. - Regulation
This framework is strictly regulated by SEBI to encourage anchor investors’ interest in the IPO, even after it opens for the public. - Impact
On a broad level, lock-in periods mitigate manipulation of the market and make sure that the interests of anchor investors are in alignment with the other investors and the company behind the IPO. Anchor investors encourage other investors who perceive them to be credible and reliable.
Conclusion
It is evident that anchor investors offer credibility to an IPO and help create public interest and buzz around it. Hence, these investors are offered the priority option to subscribe to the company’s shares at a fixed price. However, retail investors have to place a bid within the price band and, for this reason, look at the anchor investor list. This allows them to gauge the quality of the IPO and decide if they want to add it to their portfolio.
