What Is The Meaning Of Anchor Investors in IPO?
Anchor investors play a crucial role in the success of an Initial Public Offering (IPO). They are institutional investors who are invited to invest in a company before the IPO opens to the general public. This group typically includes banks, mutual funds, and other large financial institutions, and their participation is designed to instill confidence in the broader market about the upcoming IPO. Understanding the role of anchor investors can help retail investors make more informed decisions as they navigate stock trading and IPO investments.
Who Are Anchor Investors?
Anchor investors are institutional investors that are allocated shares before the IPO is made available to the public. They commit a substantial amount of capital to the IPO, which not only helps provide early funding for the company but also acts as a vote of confidence, indicating that the company has solid prospects. Their participation is restricted, with specific rules such as a lock-in period that prevents them from selling their shares for a certain period post-IPO. This ensures stability and reduces the chances of volatility once the stock starts trading.
Why Are Anchor Investors Important?
Anchor investors lend credibility to the IPO process. When large institutions show interest in a company’s shares, it signals to the market that the IPO is potentially worth investing in. For retail investors, who might not have the resources to thoroughly analyze a company’s fundamentals, anchor investors can serve as a marker of the IPO’s quality. If institutions are willing to commit funds, it can give retail investors more confidence to follow suit.
In India, anchor investors can be allocated up to 60% of the shares reserved for Qualified Institutional Buyers (QIBs). This helps provide a strong initial response to the IPO, which can attract further interest from the public when it eventually opens up for subscription.
How Does the Process Work?
Before the IPO opens for the general public, a portion of the shares is allocated to anchor investors, typically at the upper end of the price band set for the IPO. Once they invest, these shares are locked in for a period of 30 days from the date of allotment. This lock-in ensures that anchor investors cannot offload their shares immediately after the IPO, thereby maintaining price stability.
For example, consider a company planning an IPO. It might invite institutional investors such as mutual funds, insurance companies, or pension funds to act as anchor investors. These entities buy a significant portion of shares before the IPO opens to retail investors, signaling that the company has credible backers.
Benefits to Retail Investors
Retail investors can gain several advantages by observing anchor investors’ participation in an IPO. First, the involvement of large, reputed institutions provides a layer of validation. It demonstrates that the company has undergone due diligence by sophisticated investors, who typically have access to better research and data than individual retail investors. This level of confidence can also influence the decision-making process when deciding to apply for an IPO through a demat account.
Furthermore, the presence of anchor investors helps create stability in the market. If an IPO is oversubscribed due to strong institutional backing, it could indicate a potentially higher post-listing price. While this doesn’t guarantee returns, it is a positive indicator for those looking to invest in the stock.
How to Invest in an IPO
To invest in an IPO, retail investors need to have a demat account, which allows them to hold shares in electronic form. Various stock trading platforms like mStock by Mirae Asset, Zerodha, Groww, and Upstox make it easy for investors to apply for IPOs directly through their platforms. They provide seamless processes for filling applications, making payments, and tracking IPO allotments.
After choosing a stock trading platform, the next step is to apply for the IPO shares. Investors can check the company’s financials, its prospectus, and whether there are strong anchor investors backing the issue. This information can help retail investors make more informed decisions about whether to invest or not.
Conclusion
Anchor investors are a vital component of the IPO process, providing stability, credibility, and early capital to companies looking to go public. For retail investors, anchor investors’ involvement is an important signal that can guide their decisions in the stock market. By observing who the anchor investors are and their level of participation, retail investors can make more informed decisions while applying for IPOs through their demat accounts.With the right research and understanding of anchor investors, retail investors can better navigate the opportunities and risks associated with IPO investments.
