By – Radhika Saini
Anchor investors or cornerstone investors, introduced by SEBI in 2009, are those institutional investors, who are offered shares in an IPO a day before the actual offer opens. By agreeing to subscribe to the shares at a fixed price, an anchor investor provides safety and consistent strength, much like an anchor. A minimum of Rs.10 crore has to be put in by each anchor investor.
Wondering, what is ‘Book Building’?
Book building is the price discovery and allocation mechanism for IPOs. It reduces underpricing or high pricing by eliminating mispricing by unscrupulous promoters/investors. However, there is a variation in book building mechanism of the Indian market from other countries, as:-
- The Indian mechanism gives investors real-time access to aggregate demand at several price points within a price range.
- The investors can observe the over-subscription for each investor category during the book-building process.
- A predetermined quota is kept reserved for three different investor groups i.e. Qualified Institutional Investors(QIBs), Non-institutional bidders(NIBs), Retail Individual bidders(RIBs).
Working of Anchor Investors
Anchor Investors subscribe to the shares at the published price. Their valuation signals also become important because the anchor portion of an issue is usually taken up by serious institutions such as mutual funds, insurance companies, and foreign funds.
Under the ‘Anchor mechanism’, the information related to the IPO firm, price discovery, or any information of such regard is determined by the informed institutional investors i.e. anchor investors and is made available to the non-institutional and retail investors.
They are compensated with assured allocation for their voluntary disclosure of the information about the quality of the issue.
Regulations on Anchor Investors
SEBI laid down the following provisions for the firms and Anchor Investors(AIs):
- AIs are required to invest at least Rs. 10 crores in public issues.
- Anchors are required to pay the difference if the offer price exceeds the bid price. However, in the opposite situation, the difference is not reimbursed.
- 1/3rd of the portion available for AIs is reserved for domestic mutual funds.
- AIs are supposed to place orders 1 day before the bidding and are allotted within that time frame.
- A 25% margin is mandatory for the bid and the rest is paid in the next 2 days.
- The shares allotted to the AIs are locked for 30 days i.e. they cannot sell their shares for 30 days from the allotment date.
- Merchant bankers, promoters, or their relatives are not permitted to apply for shares under the Anchor Investor category.
SEBI has doubled the quota reserved for anchor investors and removed the restrictions on the maximum number of anchor investors. This means that investment bankers can now rope in as many Anchor Investors as they want.
Benefits of Anchor Investors
The concept of ‘Anchor Investors’ was introduced to enhance the book-building process, avoid underpricing and maintain transparency with the retail investors. Over the past decade, such investors have helped in enhancing the credibility of the issuing firm and eliminating information asymmetry. Moreover, the IPOs which are backed by Anchors might add a premium to the initial price, hence attracting other investors. Since price and volume traded are being available to the general public, value uncertainty is also eliminated by anchor investors’. Also, Anchors being QIBs are acquainted with research to assess market demand, which in turn reflects in their pricing of the stock and consequently decreases the speculation over the listing price of the IPO. Hence, the information asymmetry between issuing firms and investors is eliminated and it develops confidence in the investors.
The involvement of Anchor Investors in the process is also beneficial for the issuer and bankers, as nearly a third of the IPO is covered before the opening day.
Zomato, the online food delivery platform, had raised Rs. 4197 crores from 186 anchor investors. The company had reported that it had allotted Rs. 55.22 crores equity shares to anchor investors for Rs.76 per equity share. The funds raised through anchor investors are almost 45% of the total issue size.
Overall, 75% of the issue size is reserved for QIBs, while 25% of shares have been reserved for high net worth individuals and retail investors.
More than 2% of the anchor book was allotted to New World Fund, Tiger Global Investment Fund, Fidelity Fund, Baillie Gifford Pacific Fund, Morgan Stanley Investment Fund, Canada Pension Plan Investment Fund, Government of Singapore, Kotak Flexicap Fund, among other marquee investors.
Here, the IPO opened later for subscription with the price being fixed at Rs.72-76 per share of the face value of Rs.1 each.
The initiative was taken by SEBI to improve price discovery and the book building process proved wonders for the issuing firms. This procedure was designed to improve investment prospects for retail investors as well as the issuing firm’s credibility in the main market. Anchor investors aided IPOs in obtaining better pricing, increasing market demand for the IPO, reducing listing day risk, and even increasing secondary market liquidity after the IPO.
Thus, anchor investors play an important role in giving a clear picture of the prospects of the firm and reducing information asymmetry between the investor and the investing firm.