What is an Anchor Investor?

An anchor investor refers to a rule-based concept under the SEBI guideline. Which allows only qualified institutional buyers to apply for shares in an IPO before its opening to the public. These investors may include mutual funds, insurance firms, or banks with strong financial records. Additionally, only pre-approved institutions with long-term investment goals can participate. Anchor investors need to invest a minimum amount and follow a fixed lock-in period for their shares. This structured system supports price indication and builds early trust in the IPO process.  This article explains what are anchor investors, their key characteristics and more.  

Key Characteristics of Anchor Investors 

To better understand what anchor investors means, it’s important to know their key characteristics. 

• Institutional participation: Only experienced market participants designated as Qualified Institutional Buyers (QIBs) qualify to invest as anchor investors. 
• Market confidence indicator: Their early investment is seen as a sign of confidence in the IPO, which usually encourages more participation from retail and other investors. 
• Substantial investment size: Anchor investors are required to make large investments, generally a minimum of ₹10 crore in mainboard IPOs and around ₹2 crore in SME IPOs, along with a compulsory lock-in period. 
• Advance share allocation: Shares are allotted to anchor investors at a predetermined price one working day before the IPO opens for public subscription. 
• Role in price discovery: By committing significant capital upfront, anchor investors assist in establishing a reasonable valuation and contribute to post-listing price stability. 

Who Can Be an Anchor Investor? 

After understanding what is an anchor investor, individuals need to learn entities that are eligible to participate as anchor investors in an IPO to make a informed decision.  

• Mutual Funds: Registered mutual fund houses investing on behalf of their schemes. 
• Insurance Companies: Life and general insurance firms with long-term investment horizons. 
• Pension and Provident Funds: Institutional investors overseeing retirement and employee savings programs. 
• Sovereign Wealth Funds: State-controlled investment funds that utilise excess national reserves. 
• Foreign Portfolio Investors (FPIs): International institutional investors who are registered with Indian market authorities. 
• Alternative Investment Funds (AIFs): Eligible Category I and Category II AIFs participating as QIBs. 

How Do Anchor Investors Work in an IPO? 

Anchor investors meaning can be better understood by understanding how they work in the IPO process. Here’s how their participation typically works step by step: 

• IPO price band is announced: The company and lead managers declare the price band and open the anchor portion for eligible institutional investors. 
• Anchor bidding happens first: Anchor investors place bids one working day before the IPO opens for retail and other categories. 
• Shares are allotted to anchors: Based on demand, a fixed number of shares are allocated to anchor investors at the finalised anchor price (within the price band). 
• Anchor participation supports price discovery: Large early bids help gauge institutional demand and assist the issuer in arriving at a fair offer price. 
• IPO opens for public subscription: After anchor allotment, the issue opens for QIBs (non-anchor), Non-Institutional Investor (NIIs), and retail investors for regular bidding. 
• Anchor details are disclosed: The company/stock exchanges disclose anchor investor names, allocation details, and the anchor book price before the issue opens to the public. 

Having understood anchor investor meaning and how it works in IPO process, let’s explore the SEBI rules for an anchor investor.  

SEBI Rules for Anchor Investors 

SEBI has laid down specific guidelines to regulate anchor investor participation in IPOs, ensuring transparency and market stability: 

• Minimum Investment: An anchor investor must invest at least ₹10 crore in a mainboard IPO and ₹2 crore in an SME IPO. 
• Allocation Cap: Anchor investors can be allotted a maximum of 60% of the QIB portion of the IPO. 
• Advance Allotment and Disclosure: Anchor shares are allocated one working day before the IPO opens, and details of anchor investors, including their names and allocation, must be disclosed publicly. 
• Lock-in Period: Shares allotted to anchor investors are subject to a mandatory lock-in typically 30 days for a portion of the allocation and 90 days for the remaining shares. 
• Qualified Institutional Buyers Only: Only entities classified as QIBs under SEBI regulations are eligible to participate as anchor investors. 

Lock-in Period for Anchor Investors 

The lock-in period for an anchor investor is explained below: 

1. As previously mentioned, anchor investors are bound by a 30-day lock-in period. This precautionary measure aims to prevent significant market volatility that might arise if anchor investors were to quickly sell their holdings for listing gains in the open market.  
2. However, historical observations revealed that when anchor investors sell their stakes after the initial 30 days, it triggers a substantial decline in the company's share prices, causing panic among retail investors and adversely affecting their interests.  
3. To address this, SEBI introduced revised regulations stating that after the initial 30 days, anchor investors can only sell half of their stake, and the remaining half can be offloaded after 90 days. These SEBI regulations aim to enhance stability in the share prices of such stocks and contribute to overall market stability. 

Investors can better understand who are anchor investors by learning the difference between anchor investors and QIBs. 

Difference Between Anchor Investors and QIBs 

The table below shows the difference between anchor investors and QIBs 

Importance of Anchor Investors in IPOs 

Having clarified what an anchor investor is, investors need to examine why one is crucial to the success of an initial public offering.  Anchor investors play an important role in the IPO process. Their early investment helps both the issuing company and future investors.  

Improves Confidence   

When trusted institutions participate early in an IPO, it creates a positive signal in the market. Public investors may consider this a sign of thorough research and risk evaluation, which may encourage them to apply for the IPO.  

Price Discovery  

Price discovery becomes easy as anchor investors often participate at the upper end of the price band. Their investment range gives an indication of how the shares may perform.  

Early Fund Commitment  

Early fund commitment by anchor investors helps the company meet minimum subscription requirements. Additionally, this commitment helps ensure a smooth start for the IPO process.  

Reduced Volatility  

Reduced volatility during listing may occur as anchor investors cannot sell their shares for 30 days post-allotment. This holding period supports price stability in the initial trading sessions.  

Improved Public Participation  

Improved public participation is often seen when retail investors observe the presence of well-known anchor investors. Their involvement increases confidence in the IPO’s valuation and expected stability after listing. 

Disclaimer: All investments are subject to market risks, economic conditions, regulatory changes, and other external factors. Returns are not guaranteed and may vary based on market performance and investment tenure. Investors should assess their risk tolerance and financial objectives, conduct their own research, and consult a qualified financial advisor before making any investment decisions. 

Conclusion 

Anchor investors play a vital role in enhancing IPO credibility, ensuring price discovery, and building investor confidence. Their early participation signals trust from seasoned institutions, helps stabilise stock prices during listing, and encourages wider public participation. For investors using a stock market trading app, understanding anchor investor activity can provide valuable insights into IPO performance and market sentiment.