Anchor Investor

What is the concept of anchor investor? When was it introduced?
An anchor investor in a public issue refers to a qualified institutional buyer making an application for a value of Rs 10 crore or more through the book-building process. Securities and Exchange Board of India (Sebi) introduced the concept of “anchor investor” in public issues in July 2009 with a view to create a significant impact on pricing of initial public offers. Since equity markets are volatile, it is believed that companies going for initial public offering (IPO) would benefit from anchor investors.

What is the significance of an anchor investor?
An anchor investor can attract investors to public offers before they hit the market to infuse confidence. The volume and value of anchor subscriptions will serve as an indicator of the company’s reputation and soundness of the offer. Finally, the anchor investor sets a benchmark and gives a guideline for issue pricing and interest among Qualified Institutional Buyers (QIBs).

What are the conditions stipulated for an anchor investor?
Up to 30% of the portion available for allocation to qualified institutional buyers
(QIBs) is required to be made available to anchor investor(s) for allocation. An
anchor investor is required to make an application for a minimum value of Rs 10 crore in a public issue. Allocation of shares to anchor investors is made on a
discretionary basis and subject to a minimum number of two such investors for
allocation of up to Rs 250 crore and five such investors for allocation of more than Rs 250 crore. Company has a right to reject the anchor investor’s bid. An anchor investor is required to pay a margin of at least 25% on application with the balance to be paid within two days of the date of closure of the issue. If the price fixed as a result of book building is higher than the price at which the allocation is made to anchor investor, he is required to bring in the additional amount. However, if the price fixed as a result of book building is lower than the price at which the allocation is made to such investors, the excess amount is not refunded. The number of shares allocated to anchor investors, and the price at which the allocation is made, is made available in public domain by the merchant banker before opening of the issue. There is a lock-in of 30 days on the shares allotted from the date of allotment in the public issue. Neither the merchant bankers nor any person related to the promoter/promoter group/merchant bankers in the concerned public issue can apply under anchor investor category. The parameters for selection of anchor investor are required to be clearly identified by the merchant banker and are made available as part of records of the merchant banker for inspection by the board.

How is an anchor investor different from a private equity or a venture
capital investor?
A private equity investor is a person with deep pockets and capacity to play the role of a venture capitalist. The anchor investor, on the other hand, is a bridge between the company and the public in the run up to an initial public offer. Getting an anchor investor would ensure greater certainty and better price discovery in the issue process. If some investor is ready to come in with prior commitment, it enhances the issuer company’s ability to sell the issue and generate more confidence in the minds of other investors.