What role do anchor investors play in an IPO

Two colleagues sharing a cab ride to office have money conversations.

Aruna: Markets are doing well. I wish I could make some extra money from it.

Sarika: Yes, same here. IPOs are quite the money-spinners today I hear.

Aruna: Yeah, more than half a dozen IPOs in August alone. My broker says to look at anchor investor book before applying.

Sarika: Who are anchor investors? Promoters?

Aruna: No. Anchor investors are institutional investors who are offered shares a day before the IPO opens.

Sarika: If some are buying shares ahead of IPO, are they not cutting our chances?

Aruna: Haha. Actually, anchor investments are a useful guide to other investors. They indicate whether there is demand for IPO offered.

Sarika: Do anchor investors get any discount?

Aruna: No. They are supposed to ‘anchor’ the issue by agreeing to subscribe to shares at a fixed price. Anchor investors can bid for shares at any price within the IPO price band.

Sarika: Then, how is this important? To me it seems just another share-sale!

Aruna: In a bull market, everything seems simple. But actually anchor investors are quite important for small investors. Unlike brokerages who simply put out IPO reports, anchor investors have skin in the game. Typically, they are mutual funds, insurance companies and foreign funds. They would have done better research.

Sarika: So, if the public issue has any problem, will the anchor investors give it a tepid response?

Aruna: Yes, Sari. There have been instances of some IPOs failing to mop up money from anchor investors, or anchor investors bidding at the lower end of the IPO price band.

Sarika: Oh, there is some method to the madness then! I was thinking they are like IPO brand ambassadors.

Aruna: Obviously there is a lot of at stake. Its real money that anchor investors put in and they can’t sell their shares for at least 30 days after the allotment. So, they have to be doubly sure.

Sarika: Where do I get anchor investor information?

Aruna: Anchor investor details are published in BSE Notices and NSE Circulars a day before the IPO opens for the public. The communique will mention shares allotted to each anchor investor, percentage of anchor investor portion allotted, value of shares allotted and so on.

Sarika: Interesting. In comparison to all the grey market premium (GMP) talk on upcoming IPOs, I suppose the anchor investor activity is a far better signal.

Aruna: Definitely. And we have reached office. Time to drop anchor here!

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