Who are anchor investors?

Tata Motors is planning to list one of its subsidiaries, Tata Technologies, this fiscal. It will be after over 18 years, that India’s primary market will see listing of any Tata Group firm. The salt-to-software conglomerate will use the proceeds to expand the business of Tata Technologies.

But before the IPO is listed, the company carefully chooses its anchor investors. Market regulator Securities Exchange Board of India (SEBI) had introduced the idea of anchor investor in 2009. Anchor investors, also referred to as cornerstone investors in some global markets, are institutional investors who are allotted shares a day before the IPO opens.

Big names in the anchor book instills confidence in the retail investors. Retail investors tend to take cues from the anchor book.

On the flip side, if anchor demand is weak it can impact overall subscription in the IPO. Anchor allotment can be made only to qualified institutional buyers or QIBs. QIBs are entities such as sovereign wealth funds, mutual funds, pension funds and foreign portfolio investors (FPIs) registered with market regulator, the Securities and Exchange Board of India (Sebi).

Talks between the issuer and potential investors begin well in advance. However, the allotment can only be made one day prior to the IPO. In most cases, anchor investors are allotted shares at the upper-end of the IPO price band.

The list of investors to get allotment in the anchor book is decided by the investment bankers handling the IPO along with the issuer company. Anchor allotments are made on a discretionary basis, unlike in the IPO, where allotment needs to be done on a proportionate basis. A company makes a stock exchange disclosure detailing the names of anchor investors and the number of shares allotted to them.

Every IPO has three broad investor categories. These include QIBs, retail investors meaning those investing up to Rs 2 lakh and non-institutional investors or NIIs who include high net worth individuals, corporate entities and family offices. According to Sebi rules, a maximum of 60 per cent of the shares reserved for QIBs can be allotted to anchor investors. A third of the shares available in the anchor book are reserved for domestic mutual funds.

While those allotted shares in the IPO can sell any time after the listing, anchor investors are subject to a lock-in period. Half of the shares allotted to anchor investors cannot be sold for a minimum of 30 days from the date of allotment and the other half have to observe a 90-day lock in.