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An IPO is a major milestone along the growth journey for any company. However, launching a successful public offer requires strategic planning and participation from key investors. This is where anchor investors become crucial. These large institutional investors inject confidence in the IPO by committing too many shares. This article will help you understand these vital anchor investors and their significance in IPO.
Who are anchor investors?
Anchor investors are large institutional players like mutual funds and pensions that commit to buying substantial IPO shares pre-issue. Securing anchors early helps establish credibility and stability for the public offering.
The company wants to sign up these anchoring investors before formally launching the IPO. The anchors agree to buy a substantial number of shares at the offer price, no matter what. This early vote of confidence helps establish stability and credibility for the upcoming offering.
Having well-known, savvy institutions anchor the deal is a strategic advantage. It signals that smart money is committed to the IPO. The anchors lend their reputation and expertise, removing uncertainty and reassuring other potential investors considering the deal.
Why do companies need anchor investors?
- Builds confidence and credibility
Having well-known, respected institutions anchor the IPO immediately establishes credibility for the offer. When major investors like Fidelity, BlackRock or Goldman Sachs sign on as anchors, it signals that savvy, experienced professionals have vetted the deal and see value in buying shares at the set price. This vote of confidence from experts who have done their due diligence removes uncertainty for potential investors and builds overall trust and enthusiasm for participating in the IPO.
- Stabilizes prices post-listing
Anchor investors commit to holding their shares for a set period rather than quickly flipping them after listing for a profit. This prevents the stock from becoming excessively volatile in the sensitive time right after the IPO. With anchors acting as long-term investors, the stock price is supported by sudden crashes. This stability allows the company to build up more widely held investor interest.
- Meets regulatory requirements
In many countries, regulator guidelines make it compulsory for companies to appoint anchor investors to meet the minimum subscription levels set for IPOs. These requirements ensure adequate participation from qualified institutional buyers to flesh out the book and avoid undersubscription. Having strong anchor demand satisfies these norms.
- Gauges investor appetite
The enthusiasm and demand from pre-IPO anchor book building help assess the appetite of larger institutional investors. Based on this response, the issuer can appropriately price and size the public offer. Strong anchor interest signals that broader investor sentiment will be positive.
- Improves prospectus disclosures
Anchor investors thoroughly scrutinise the draft red herring prospectus for due diligence. They often provide valuable feedback on the quality of disclosures that can help improve the content before publication.
Anchor investor regulations in India
In India, SEBI has established clear guidelines on anchoring investor participation in IPOs to promote transparency and accountability. Here are the key SEBI regulations for anchors:
Limit on anchor allocation
The anchor investor portion is limited to a maximum of 60% of the quota reserved for qualified institutional buyers (QIBs). This ensures significant shares are available for non-anchor QIBs and retail individual investors during public subscription.
Number of anchor investors
For IPOs exceeding ₹10 billion, SEBI mandates companies to allocate a minimum of 2 and a maximum of 15 anchor investors. This ensures diversification and caps the excessive influence of very few participants.
For IPOs of up to ₹10 billion, a minimum of 2 and the highest of 5 anchor investors are allowed. The range provides issuers flexibility based on deal size and investor mix.
One-Third reservation for mutual funds
At least one-third of the anchor book must be reserved for domestic mutual funds. This provision ensures mutual funds get reasonable access rather than only foreign investors dominating anchor participation.
Discretionary allocation
Anchor investor allocation is not proportionate but discretionary based on the issuer’s objectives. Companies allot shares tactically to build a high-quality anchor book aligned with pricing and post-listing stability goals.
Participation timing
Anchors place their final IPO bids one day before the offer opens for the general public. This helps gauge institutional demand before retail bids. The IPO price is then fixed, taking into account the anchor book.
30-day lock-in period
Anchor investor’s lock-in period is 30 days after IPO allotment. This ensures they don’t immediately flip shares once listed and contribute to volatile price swings.
Conditions for subscription
If the anchor portion is undersubscribed, SEBI requires companies to proportionately reduce the anchor investor allocation and reallocate those shares to other investor categories. This maintains balance.
How do companies select anchor investors?
Selecting the right anchor investors is key for companies planning an IPO. It’s a strategic process that requires careful evaluation of candidate institutions. Here are some of the steps:
- Prepare a target list
The company first prepares a list of domestic and global institutions that meet anchor criteria – size, reputation, sector expertise, investing history, etc. Input from investment bankers who manage roadshows is incorporated.
The aim is to create a diverse list of credible mutual funds, pensions, insurers, wealth funds, etc., relevant to the IPO. Both new long-term focused investors and existing company shareholders are considered.
- Conduct due diligence
Extensive due diligence is undertaken on the prospective anchor investors. Details like assets under management, portfolio concentration, past IPO track record, value investing philosophy, and sensitivity to regulatory changes are analysed.
The goal is to assess whether investors have adequate capacity, truly understand the sector, and will hold shares long-term rather than flip them. Institutions with an appetite for overvalued IPOs are avoided.
- Company presentations
The issuer company schedules one-on-one presentations with shortlisted anchors to introduce business models, financials, prospects, management, etc. This provides a platform for the institutions to ask questions and clarify doubts directly with the company.
- Secure investor feedback
During meetings, detailed feedback is obtained from anchor investors on assessing the company’s valuation, earnings projections, risks, capital structure, and objectivity of disclosures made in the IPO prospectus.
This input helps the issuer improve the information provided to potential shareholders. The investor’s view on the appropriate price band is also considered.
- Finalise anchor book
Based on investor discussions, the issuer tactically finalises the anchor book to align with IPO objectives. The ideal mix of investors is selected to inspire overall confidence in the public offer.
Allocations may be adjusted to ensure sufficient long-term investors for price stability and some short-term names to optimise demand. Prominent institutional names are highlighted.
- Review prospectus
Before filing the final red herring prospectus, the issuer reviews the document again in light of comments and feedback provided by anchor investors during discussions. This further enhances the quality of disclosures.
Thus, selecting anchor investors is highly strategic based on a detailed evaluation of investor profiles and extensive engagement. It is key to obtaining optimal anchor commitments aligned with the IPO’s pricing and post-listing goals.
Conclusion
Anchor investors play a pivotal role in establishing credibility and stability for IPO companies. Onboarding reputed institutional anchors early on signals quality inspires investor confidence, and sets the right tone for a successful public offer. Their participation and reputation are key to anchoring an IPO.
FAQs
Anchor Investors bring in substantial capital, reduce price volatility, and enhance the company’s credibility. Their involvement often attracts more retail and institutional investors.
Anchor Investors are institutional investors who invest in an Initial Public Offering (IPO) before the public offering opens. They play a key role in boosting confidence and attracting other investors.
Anchor Investors commit to buying a significant portion of the IPO shares, demonstrating confidence in the company. This helps in setting a positive tone for the IPO.