SLATE. All you wanted to know about anchor investors

After a prolonged lull, the IPO market is buzzing again. Offers from Coffee Day Enterprises and Interglobe Aviation (owner of IndiGo Airlines) have just concluded and those from well known firms such as L&T Infotech and VLCC in the offing. As a retail investor, how can you judge if an IPO is much in demand or will have no takers? The behaviour of anchor investors to the IPO can offer some clues.

Anchor investors are institutional investors who are offered shares in an IPO a day before the offer opens. As the name suggests, they are supposed to ‘anchor’ the issue by agreeing to subscribe to shares at a fixed price so that other investors may know that there is demand for the shares offered. Each anchor investor has to put a minimum of ₹10 crore in the issue.

SEBI introduced the concept of anchor investors in IPOs in 2009. Book built IPOs are supposed to have a 50 per cent reservation for qualified institutional buyers (QIBs). Up to 30 per cent of the total issue size can be allotted to anchor investors. No merchant banker, promoter or their relatives can apply for shares under the anchor investor category. In offers of size less than ₹250 crore, there can be a maximum of 15 anchor investors, but in those over ₹250 crore, SEBI recently removed the cap on number of anchor investors. Now, there could be 10 additional investors for every extra ₹250 crore allocation, subject to minimum allotment of ₹5 crore per anchor investor.

The anchor investor can’t sell his shares for at least 30 days after the allotment. This rule ensures that investors who want to flip shares on listing, do not use the ‘anchor’ route. Anchor investors can bid for shares at anywhere within the price band declared by the company. If the price discovered through the book building process is higher than the price at which shares were allotted to anchor investors, then these investors have to bring in additional funds to make good the shortfall. But if the book built price is lower, the excess amount is not refunded to them.

Today, many have a complex structure and are not necessarily profitable at the net level — Sadhbhav Infrastructure Projects, Adlabs Entertainment and Café Coffee Day are examples. In such cases, the anchor investors can guideother investors.

Unlike analysts, brokerages or investment bankers who may put out reports on an IPO, anchor investors have their own skin in game. They have actually subscribed to the shares at the published price. As the anchor portion of an issue is usually taken up by serious institutions such as mutual funds, insurance companies and foreign funds, their valuation signals can be useful. If the issue has problems, say, of corporate governance, or asks for a stiff price, the issue will face a tepid response from anchor investors.

Prabhat Dairy’s offer failed to draw anchor investors as the price was at a sizeable premium to listed peers and there were challenges in growing the business. In the case of Adlabs Entertainment IPO too, anchor investors had bid at the lower end of the price band. In the public issue which opened a day later, poor retail response forced the company to lower its price band to get subscribed.

Today, grey market premia on upcoming IPOs are much talked about. But the quoted ‘premia’ are quite unreliable. Look to anchor investors for better cues.

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