Sharekhan Blog

Anchor Investors in IPO Explained

  • Apr 1, 2024

It becomes crucial for investors considering making an IPO investment to understand anchor investor significance.

Additionally, understanding anchor investors might aid investors in comprehending some of the subtleties associated with IPO investing generally.

So, let’s find out who is anchor investor, what they do, etc.

Anchor Investor Meaning

Reputable institutional investors who join an IPO before it's accessible to the general public are known as anchor investors. These investors include pension funds, insurance firms, and mutual funds. Their main responsibility is establishing the IPO's tone by building confidence and supporting the company's prospects. Because they do extensive research before making an investment, these investors are frequently seen as credible.

What do Anchor Investors do?

"Cornerstone investor" is another term for an anchor investor. If you understand what an anchor investor accomplishes and the position they play, the meaning of an anchor investor becomes evident. An anchor investor is a key player in initial public offerings, or IPOs. While normal retail investors may not be unfamiliar with this word, individuals actively involved in the listing of an upcoming initial public offering (IPO) may find it quite puzzling.

An institutional investor who takes part in an IPO of any kind of business is known as an anchor investor. In terms of price stability, an anchor investor gives an initial public offering (IPO) stability. Mutual funds, overseas portfolio investors, and insurance companies that purchase shares in an initial public offering (IPO) before the offering is made available to the general public are a few examples of anchor investors.

The function that an anchor investor performs is what the term "anchor investor" refers to. An anchor investor is someone whom a merchant banker hires to stabilise an initial public offering (IPO), much like an anchor steadies a ship. Because they make large offers, anchor investors are important players in the price discovery process. These show institutional investors' interest in any given initial public offering.

What is The Role of Investors in an IPO?

Anchor investors are important players in every IPO process. The following is a summary of their roles:

1. The Price Discovery: When an IPO occurs, large bids are made by anchor investors. This promotes price discovery and shows that institutional investors are interested in the IPO above.

2. A Boost to Investor Confidence: The ability of investors to invest more in the IPO is a prerequisite for a successful IPO subscription. Any IPO with funds contributed by anchor investors encourages investors to participate by demonstrating to them the stability and credibility of the offering.

3. The Provision of Price Stability: Anchor investors commit to holding shares they purchase in an initial public offering (IPO) for at least 30 days. This pledge helps to lessen the pressure on ordinary investors to sell the issue after it is listed.

Anchor Investor SEBI Guidelines

Anchor investors fall into the category of QIBs (qualified institutional buyers), according to the Securities and Exchange Board of India (SEBI). In an IPO, they have to apply for shares valued at least Rs. 5 crores. It's crucial that they submit their application the day before the IPO goes live to show that they are sincere about the offering.

Anchor Investor Lock-In Period

To guarantee commitment, anchor investors' purchased shares have a set lock-in duration. The remaining 50% of these shares are frozen for 90 days from the award date, and the remaining 50% have a 30-day lock-in term.

This technique gives other investors peace of mind by guaranteeing that the anchor investor stays involved in the business after the initial public offering (IPO).

Anchor Investors Bidding Rules

1. One day prior to the launch of the issuance, anchor investor bidding opens.

2. After placing a bid, anchor investors cannot change or withdraw it.

3. At the time of application, anchor investors are required to pay the entire bid sum.

4. The date on which anchor investors submit their bids will also mark the completion of the allocation to them.

5. A minimum value of Rs. 10 crore for a mainboard IPO and Rs. 1 crore for an SME IPO may be applied for by an anchor investor.

6. As many shares as are available in the anchor category are available for application by anchor investors.

7. The anchor investor group does not allow any merchant bankers, promoters, family members, or relatives to register for shares.

The Bottom Line

Anchor investors are important participants in an initial public offering (IPO) because they offer consistency, legitimacy, and a standard for valuing the business. They gain from it because of their early involvement and the provision of a discounted share price, but their presence also affects an IPO's performance.

As we can see, anchor investors are crucial to the success of initial public offerings (IPOs) and play a big part in the industry.  We hope you’ve understood exactly what they imply and why they are so significant the next time you hear this term in the news.

Team Sharekhan
by Team Sharekhan

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