Anchor Investors work as a bridge between the company and the public in the initial public offer. The concept of an anchor investor was introduced to improve the price discovery during IPO. It was an effort to improve investment opportunity for retail investors with the company.
Anchor Investors belong to the Qualified Institutional Buyers (QIB) category so they are always in a better position to measure the fundamentals as well as the future prospects of a company. QIB includes foreign institutional investors (FII), mutual funds, banks, provident funds etc.
Anchor Investors being initial investors add credibility to a IPO, since they are a known to be smart investors and would invest in a good IPO. The bidding for Anchor Investors opens a day before the public offering.
One third of the Anchor Investor portion is reserved for domestic mutual funds. The minimum application size for each anchor investor is Rs 10 crore.
Anchor investors tend to apply with a margin amount of 25 per cent of their application and the balance within two days of the close of the issue. 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.
If the price fixed as a result of book building is higher than the price at which the allocation is made then the Anchor Investor is required to bring in the additional amount.
The company is required to get at least 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.
Recent Initiative by SEBI
SEBI has approved a number of measures recently paving an easier way for companies to raise money rejuvenating the IPO market. In an effort to increase the share of serious and committed participants, the regulator has enhanced the ability of long term investors to participate more meaningfully as an Anchor Investor in an IPO investment.
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The measures also include doubling the investment bucket for Anchor Investors. So, now the bucket for anchor investors has been doubled to 60 per cent from the previous 30 per cent of the institutional allocation.
Sanjay Sharma, head of equity capital markets, Deutsche Equities India recently commented: "A larger anchor tranche, even though it comes with a 30-day lockup, will be helpful in allocating shares to the most appropriate investors for a particular company and also help in better price discovery."