Anchor Investor Explained: Meaning, Role & Impact on IPOs

When an IPO suddenly gains traction and receives massive subscriptions as soon as it opens, there's often a major reason behind it: Anchor Investors. These investors inject capital into the IPO even before it launches, instilling confidence and stability in the market and signaling that the company may be trustworthy. In this blog, we'll explain in simple terms who anchor investors are, their role in an IPO, and whether their investment truly determines the success of the IPO or simply creates a perception of success.

What Is an Anchor Investor?

An anchor investor is a large institutional investor who invests in an IPO before it opens to the public. This includes mutual funds, insurance companies, foreign portfolio investors (FPIs), pension funds, or other large financial institutions. Their investment is intended to build initial confidence and stability in the IPO.

SEBI Regulations and Minimum Investment

The role of anchor investors in India was introduced by SEBI in 2009.  According to current regulations, anchor investors are generally required to invest a minimum of ?10 crore in a main-board IPO. Information about their allocation is made public before the IPO opens to ensure transparency.

Anchor Investor vs. Other Investors

Anchor investors are allotted shares one day before the IPO opens and are subject to a lock-in period of 30 to 90 days. This lock-in period does not apply to retail and other QIB investors. This is why anchor investors are considered the first indicator of the IPO's direction.

Anchor Investor vs General QIB / Retail Investor

Why Do Companies Invite Anchor Investors?

Building Trust and Confidence in the Market : 

When a company knows during an IPO that large, reputable institutional investors such as mutual funds, pension funds, or insurance companies are already taking shares, it acts as a kind of "vote of confidence." Other investors and retail shareholders feel that "if such a large institution is involved, the IPO will be strong." In this way, the name of the Anchor Investor acts as a guarantee of expectation and trust in the IPO.

Reducing Volatility at the Time of Listing : 

The share price can fluctuate significantly as soon as the IPO is listed. However, when large investors are already involved, the likelihood of initial panic selling or a sudden drop is reduced. This allows the share price to start with expected stability, which is beneficial for both the company and small investors.

Helping in Price Discovery : 

Anchor Investors invest large sums during the book-building process. Their bids and investments help determine what the fair price of the IPO shares should be. This ensures fair pricing in the IPO and reduces the chances of overpricing or underpricing.

Making the IPO Appear Strong and Credible :  

If the IPO prospectus includes the names of several well-known Anchor Investors, the IPO itself is able to present itself to the market as "good, reliable, and backed by institutions." This attracts smaller or new investors. In such cases, the popularity and likelihood of subscription of the IPO increase.

Institutional Commitment and Guarantee of Initial Capital : 

Anchor Investors are large investors who are ready to invest millions of rupees in the IPO. Their participation provides the company with initial capital, ensuring the smooth functioning of the IPO. Also, because they are professionals and conduct in-depth analysis before investing, their participation is a positive indicator of the quality of the IPO.

The Role of Anchor Investors in IPO Pricing

Helping to determine the price band : 

Anchor Investors conduct thorough research before bidding, which helps the company and bookrunners understand how much the market is willing to pay for the shares. This process is called price discovery.

Influencing market sentiment : 

When reputable Anchor Investors participate in an IPO, it sends a positive signal that the share price may be fair. This also increases confidence among other investors.

Impact on investment psychology : 

Often, people think “If big investors are buying, then this IPO is probably good.” This psychology increases the demand for the IPO.

Potential risks : 

Sometimes, the participation of Anchor Investors can lead to an overvaluation of the IPO, and if the fundamentals are not strong, there may be disappointment upon listing.

Lock-In Period and Why It Matters

A lock-in period is the time during which anchor investors cannot sell the IPO shares they have purchased. In India, according to SEBI regulations, a 30-day lock-in applies to 50% of the shares held by anchor investors, and a 90-day lock-in applies to the remaining 50%. This means they cannot exit by selling their shares immediately after listing.

Why is this rule necessary?

The lock-in period is in place to prevent large-scale selling in the initial days of the IPO and to maintain price stability. It ensures that anchor investors are investing not just for listing gains, but because they have confidence in the company's strength and future prospects.

Its impact on the market

If anchor investors hold onto their shares after the lock-in period ends, it sends a positive signal to the market, indicating that the company may be strong. However, if they sell their shares as soon as the lock-in ends, it can create panic among retail investors and cause the share price to fall.

Why is this important for retail investors?

Smart investors always track the lock-in expiry dates of IPOs, as this is when stock volatility is likely to increase. Therefore, the anchor investor lock-in is considered an important indicator when investing in an IPO.

How Anchor Investors Influence Market Sentiment 

When anchor investors are involved in an IPO, their influence extends beyond just the investment itself, impacting overall market sentiment. Their presence can affect the IPO's demand, pricing, and listing performance.

Impact on the Market Before the IPO : 

When well-known Anchor Investors participate in an IPO, it creates a positive sentiment in the market. Media coverage increases, discussions begin on social platforms, and investors feel that the IPO is likely to be trustworthy. Often, simply seeing the Anchor Investor list can change the perception of the IPO.

Impact During Subscription : 

Anchor Investment has a direct impact on the IPO's subscription. Retail, HNI, and QIB investors believe that if large institutions have invested, the IPO will be strong. This is why the likelihood of an IPO being oversubscribed often increases after the Anchor Allocation.

Impact After Listing : 

If Anchor Investors continue to hold the shares even after the lock-in period ends, investor confidence increases further. However, if they sell the shares rapidly, panic selling may begin, putting pressure on the share price.

Psychological Impact

Anchor Investors create a "Signal Effect." People assume that if large and experienced investors are putting money into the IPO, it will be premium and of high quality—this perception is known as the Halo Effect in market psychology.

The Risks Retail Investors Ignore

Often, retail investors invest in IPOs without doing any research, simply because of the presence of anchor investors. But the truth is, anchor investment is only an indicator, not a guarantee. Therefore, it's crucial to understand the risks involved.

The Risk of Blind Trust

Many retail investors invest in IPOs simply because well-known anchor investors are involved. However, large institutions invest based on their own research, strategy, and timing—their approach differs from that of retail investors.

The Risk of Short-Term Intent

Not every anchor investor invests for the long term. Sometimes, they participate in IPOs solely for listing gains or short-term profits. They may sell their shares as soon as the lock-in period ends, which can lead to a price drop.

The Risk of Overvaluation

Sometimes, anchor funding can lead to an inflated valuation of the IPO. While there may be initial hype, if the fundamentals are not strong, the stock may underperform after listing.

Impact of Lock-In Expiry

If anchor investors sell a large number of shares as soon as the lock-in period ends, it can trigger panic selling and cause the stock price to fall. Therefore, it's crucial to track the lock-in timeline when investing in an IPO.

Learning for Retail Investors

View anchor investment only as a signal, not as a final decision. Investment in an IPO should always be based on the company's business model, financials, valuation, and growth potential not just on hype.

Should Retail Investors Rely on Anchor Investor Behaviour?

Anchor investors provide a certain level of confidence in an IPO, but it's not a guarantee of success. Their presence indicates that the company has attracted institutional interest, but retail investors should view it only as a reference point. Making the right investment decision requires understanding the company's financials, business model, valuation, industry landscape, and future growth potential. Consider anchor investors as just one indicator not the sole basis for your decision. If the IPO story is strong, and there's good anchor participation, it can be a positive sign. However, if there's only hype and weak fundamentals, anchor investment alone won't be enough to ensure success.

Conclusion 

In conclusion, anchor investors do provide confidence and direction for an IPO, but they shouldn't be the sole basis for your investment decision. Their participation indicates that the company has generated institutional interest in the market, but the final decision should always be based on your own research, risk tolerance, and investment goals. Investing in an IPO should be done wisely, not impulsively.

FAQs

Q1. Who is an Anchor Investor in an IPO?

An Anchor Investor is a large institutional investor who invests before the IPO opens.

Q2. Does an Anchor Investor guarantee IPO success?

No, an Anchor Investor only provides a signal of confidence, not a guarantee of success.

Q3. What is the lock-in period for an Anchor Investor?

The lock-in period for an Anchor Investor is typically 30-90 days.

Q4. Should retail investors follow Anchor Investor decisions?

No, consider the Anchor Investor's decision only as an indicator; make your final decision based on your own research.

Q5. Where can we find Anchor Investor details?

Anchor Investor details can be found in the IPO prospectus and SEBI filings.