Chapter 11: Types of IPO Investors

Planning to upgrade your home with a new smart TV, refrigerator, or washing machine for your family? Chances are that products from LG Electronics⁠ would be among your top choices. Over the years, the company has become a trusted name in Indian households, known for its innovative technology and reliable products.

Now imagine getting an opportunity not just to buy its products, but to own a part of the company itself through an IPO.

When the IPO of LG Electronics India⁠ opened for subscription, retail investors like you showed keen interest in participating and IPO was subscribed by more than 54 times . But retail investors were only one part of the picture. So, who were the others who subscribed for the IPO?

Well, there are different types of IPO investors. Let’s find out who they are one by one.

Types of IPO investors

1.  Retail Individual Investors (RII)

Retail individual investors [RIIs] are those who can apply for shares less than or up to Rs. 2 lakh in an IPO. They have an allocation of 35% of shares of the total issue size in book building IPOs. 35% quota is applicable for those companies who had three straight years of profit. Companies that can’t meet this criterion, can allocate only 10% to retail investors. Even NRIs who apply for an IPO with less than Rs. 2 lakh fall under the RII category.

So, what about investors who want to apply for shares of more than Rs. 2 lakh?

Well, that brings us to the next type of IPO investors.

2.  Non-Institutional Investors (NII) and High Net-worth Individuals (HNIs) 

High Net Worth individuals [HNIs] are a category of investors who invest more than Rs. 2 lakh. Similarly, institutions, such as big companies, large trusts, and similar institutions, are looking to subscribe for more than Rs. 2 lakh are called Non-Institutional Investors (NIIs). These investors have an allocation of 15% in an IPO and are not required to register with SEBI.

3.  Qualified Institutional Buyers (QIBs)

Qualified institutional buyers [QIBs] are individual entities in the form of associations or firms. Banks, mutual fund companies, Foreign Institutional Investors [FIIs] registered with SEBI, and typically represent smaller investors, are allotted 50% of the IPO. For the companies that don’t have three straight years of profit, the QIB quota is 75%. QIBs cannot opt for the cutoff price.

4.  Anchor Investors

This new category of investors introduced in 2009 by SEBI is a form of QIB that can make an application for a value of ₹10 crore or more through the book-building process. Anchor investors invest in IPO before the issue is open to the public - attracting investors and helping to gain public confidence before the IPO goes public.

So, how are anchor investors different from QIBs?

Well, here’s how anchor investors are different:

• The bidding for Anchor Investors shall open a day before the issue opens They will have to apply for shares of more than ₹10 crore
• They are a subset of QIBs which means a part of QIB allocation is reserved for anchor investors. Up to 30% of the QIB portion is available to anchor investors
• They have a lock-in period of 30 days. This means they cannot sell their shares for 30 days from the date of allotment of the shares via an IPO

So, to answer the question – who other than retail investors as you subscribed to LG Electronics IPO.

Where the quota reservation was as follows:

Summary

• There are four types of investors for IPO — Retail Individual Investors (RII), Non-Institutional Investors (NII) and High Net-worth Individuals (HNIs), Qualified Institutional Bidders (QIBs) and Anchor Investors.
• Retail individual investors [RIIs] can apply for shares less than or up to Rs. 2 lakh in an IPO.
• High Net Worth individuals [HNIs] can apply for shares of more than Rs. 2 lakh.
• Qualified institutional buyers [QIBs] are individual entities in the form of associations or firms.
• Anchor Now that you know who can invest in an IPO, let's understand the workings of an IPO in the next chapter

Now that you know who can invest in an IPO, let's understand the workings of an IPO in the next chapter.