The concept of anchor investors was introduced by Securities Exchange Board of India (SEBI) with the intention to improve the price discovery during Initial Public Offers (IPOs). The process was aimed at improving the investment opportunity for retail investors with the company.
Since, anchor investors belong to the Qualified Institutional Buyers (QIBs) category they would be in a better position to gauge the fundamnetals and the future prospects of the company. QIB category include mutual funds, venture capital funds, foreign institutional investors (FIIs), domestic as well as international provident and pension funds along with banks.
All IPOs are split into sections such retail, non-institutional, and so on. QIBs are aone of the investor group. A company can only hold 30% of QIB allotment and provide it to anchor investors. The minimum application size for each anchor investor should be Rs 10 crore.
Anchor investors will put up with margin amount of 25% of their application and the balance within two days from the close of the issue.
These investors (i.e. anchor investors) are supposed to apply for the shares like regular investors at the price they seem best fit for it.
Now here is the catch, after the entire issue price is fixed according to the book-building process, anchor investors have to make up the difference if their price is lower than what has been fixed.
And if their price is above the fixed price then they will have to forgo their cash. The idea being that an anchor investor do their home-work and not get carried away.
But should their price be above the fixed issue price, they have to forgo their cash.
The company is required to get atleast two anchor investors for an issue size of up to Rs 250 crore, and for issues bigger than that there are at least five.
The details of anchor investments have to be made public before the issue opens.