Anchor Investors: How they impact the Price of Stocks

Introduction

Several types of investors invest in a company’s Initial Public Offer (IPO). The company uses the process of allotment to determine the amount of stock each type of investor receives. The allotment depends on whether the stock is oversubscribed or undersubscribed. In case of oversubscription, not all investors who have placed a bid will be allotted shares. But there is also a set of investors who receive shares even before the IPO takes place. These types of investors are known as anchor investors.

Let us look at who these anchor investors are and how they impact the price of a share.

Anchor investors are qualified institutional buyers. They buy shares in a large number and get a confirmed allotment.

Anchor investors were introduced to the financial markets in 2009. They are allowed up to 30% of the issues’ portion available for Qualified Institutional Bidders (QIB). Even though they are part of the IPO, the price of shares allotted to them is decided separately. Their allotment price is also within the IPO price band but if the price fixed during the book-building process is more than the price at which the allocation is done to anchor investors, they need to pay the price difference. In case, if the book building price is less, they will not get back the price difference. The company allots the shares at a fixed price to the anchor investors only a day before the IPO.

Each anchor investor has to invest a minimum of₹10 crores for the issue. They have to buy the shares at a price fixed by the company. This increases a retail investor’s confidence in the demand for the shares. The presence of anchor investors also increases the belief retail investors have in the quality of the IPO. Thus, anchor investors are the bridge between the issuing company and the retail investor.

There can be a minimum of 15 anchor investors if the offer is less than ₹250 crores. However, if the offer size is more than ₹250 crores, the number of anchor investors can be increased to 25.

Additional Read: What is an initial public offering?

Why do anchor investors have to keep their shares locked in?

These anchor investors cannot sell their shares till 30 days from the allotment date. This period of thirty days is called the lock-in period. Keeping the shares locked in stops a significant drop in the price in the share after the IPO. Anchor investors might want to sell their shares immediately after listing to make listing gains. Since they have invested a considerable sum in the issue, any sale would make the price of the shares fall. This lock-in period prevents them from selling the shares and hurting the price of the shares.

A few investors wait for the opportunity for an anchor investor’s lock-in period to get over to invest in the stock. However, this may not be the case for each issue. There are issues where anchor investors continue to hold shares post lock-in period. Still, if there is a fall in the price, it should be evaluated first before making any investment decision.

Additional Read: What is IPO & What are the Advantages of IPO?

Conclusion

Anchor investors help in creating the confidence of the retail investors. If some of the marquee investors invest in an IPO, this also signals that the issue is good. But one should not take the decision solely based on the Anchor investors. Before rushing to buy these stocks, you should remember to find the right price by analyzing the company’s fundamentals. Take time to research the details about the company, its long-term potential, and its ability to earn profits.

Disclaimer – ICICI Securities Ltd. ( I-Sec). Registered office of I-Sec is at ICICI Securities Ltd. - ICICI Venture House, Appasaheb Marathe Marg, Prabhadevi, Mumbai - 400 025, India, Tel No : 022 - 6807 7100. Please note, IPO related services are not Exchange traded products and I-Sec is acting as a distributor to solicit these products. All disputes with respect to the distribution activity, would not have access to Exchange investor redressal forum or Arbitration mechanism. The contents herein above shall not be considered as an invitation or persuasion to trade or invest.  I-Sec and affiliates accept no liabilities for any loss or damage of any kind arising out of any actions taken in reliance thereon. Investments in securities market are subject to market risks, read all the related documents carefully before investing. The contents herein mentioned are solely for informational and educational purpose.