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<b>Letters:</b> A free-rider problem

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Business Standard New Delhi
With reference to the editorial, "Anchoring issues" (October 28), the role of anchor investors in gauging institutional demand for the issue is self-evident. However, the role they play in valuation is subtle. To understand this, let's appreciate the fact that anchor investment is driven by potential upside, relative to potential downside. In a market where most of the issues are 'anchored', potential upside eclipses downside, that is, there is money on the table in the valuation of an initial public offering. As the lack of anchoring in such a market would imply negative signalling from the investor's perspective, there would be incentives for issuers to under-price the issue so as to attract anchor investments.

However, there is a free-rider problem associated with this. An issuer has every incentive to overprice the issue as the effect would be felt only by the followers. Hence, knowledge of lead managers, information disclosure etc, are important. If anchor investment remains a fringe development, no change is expected.

Indranil Chakraborty Mumbai
 
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First Published: Oct 28 2015 | 9:01 PM IST

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