Anchor Investors-How they affect your IPO (Initial Public Offering) price?

Anchor Investors-You might have heard about this during IPO (Initial Public Offering) of any company. Like for example, recently CARE IPO had around 12 Anchor Investors, some of them are Goldman Sachs India Fund, Birla Sun Life Insurance Co Ltd and Sundaram Mutual Fund A/C Sundaram Equity Multiplier. Do you know how they affect the pricing of IPO??

First let us understand who are Anchor Investors and what is the need of Anchor Investors during the period of IPO. This concept of Anchor Investor was actually developed to boost the retail investor confidence and to improve the price discovery. They are the part of QIBs (Qualified Institutional Buyers) category of investors. QIB category usually involves mutual funds, foreign institutional investors (FIIs), domestic as well as international provident and pension funds along with banks.  So they usually have the better understand about the company’s prospect and fundamental analysis than retail investors.

How they can affect IPO pricing? Usually you noticed that IPOs have face value and price band. Face Value will be Rs.10 and the price band will be highest and lowest bidding price. Like for recent CARE IPO, face value was Rs.10 and price band was Rs.700-750. You need to bid within that price band to get allotment. Who fix this price band? It is fixed by issuing company after consulting investment bankers and usually after undertaking the pre-marketing exercise with some leading QIBs (which includes Anchor Investors). Hence if QIBs are of more positive about the company then the price band will be higher than as usual (but their are certain maximum limit also to fix it). So in this way your IPO price band will be get affected by anchor investors.

How they boost investor confidence? We retail investors usually invest when we see that some one who have greater knowledge than us is ready to invest with eagerly. Same applies here too. When IPOs announced they mention anchor investors name too  to boost the confidence in retail investors. In one way you may say that they are like brand ambassadors of that particular IPO. To protect post market listing price fall too, SEBI made it mandatory for anchor investors to hold their investment for minimum 30 days. This usually protects retail investors from being sudden fall of price due to high selling pressure from these QIBs. So dual advantages are, they boost the confidence in retail investors by subscribing to 30% of QIB quota (50% of IPO size will be allotted to QIBs) and by investing for a minimum period of 30 days.

Few more interesting facts which we retail investors may not known are as below.

  • They apply to IPO same as retail investors and price to which they feel best.
  • Once the issue price is fixed after the book building process and found that their price is lower than the fixed price then they need to pay the difference.
  • If their price is higher than the fixed price then they need to forget the cash they invested !!
  • Reason for above regulation is, to do their research in a better way for price discovery.
  • Issuing company need to get atleast 2 anchor investors for an issue size of up to Rs.250 crore, and 5 anchor investors if the issue size is more than that.
  • Company need to made public about the anchor investors they got before issue opens.

6 Comments

  1. Hlo Sir,

    Is it mandatory to issue shares to QIB’s in case of FPO???

    Reply
    • Sourabh-I am not sure about that. Check with SEBI guidelines on the same.

      Reply
  2. Dear Basavraj,

    I have just started understanding the subject. I have a doubt that whether anchor investors can be given allocation by the issuer even after the date of opening of the issue? .Secondly, in book built issues, is the ‘bidding period’ and ‘issue period’ one and the same?

    Reply
    • Siddharth-No, they were not allowed to issue once the issue opens. Bidding price is the asked price and issued price is the listed price.

      Reply
  3. Well, your write-up is good but needs refinement to remove ambiguity. I can understand since I know something about the subject. However, those who wish to learn the subject anew will find it difficult to follow. If it is okay with you, I can help you out. Since I am a senior citizen, I would be only too happy to help out youngsters like you and learn whatever I want to learn from youngsters like you.

    In the circumstances, before you post such information, you can send it up to me for polishing and for ensuring clarity. I’ll not charge you for it. My mobile number is 9945077644 (Bangalore). I hit the bed at 8.30 PM.

    Hopefully I have not been mistaken.

    Best,

    Prof Shivakumar

    Reply
    • Prof Swaminathan-It is pleasure to know about you. Sure, in future if I write about such subject, then I share that with you.

      Reply

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