Anchor investor – Guide for Retail Investors?

With a view to create a significant impact on pricing of initial public offers, Securities and Exchange Board of India introduced the concept of “anchor investor” in public issues vide its circular dated July 9, 2009. The SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009 notified in August 2009 also contains a similar provision of anchor investor.  In view of the choppiness of the stock market, it is believed that the companies going for initial public offering would benefit from ‘anchor investor’.

Anchor investor means a qualified institutional buyer making an application for a value of ten crore rupees or more in a public issue made through the book building process in accordance with ICDR Regulations;

Clause 10 of Schedule XI of ICDR Regulation lays down the conditions for investment by Anchor Investor.

a.      An Anchor Investor is required to make an application of a value of at least Rs. 10 crore in the public issue.

b.      Upto thirty per cent of the portion available for allocation to qualified institutional buyers is required to be made available to anchor investor(s) for allocation/allotment. Which implies that out of the overall quota of 50 per cent (60 per cent if issue made under Regulation 19(2)(b) of SCRA), the anchor’s quota cannot exceed 15 per cent (20 per cent if issue made under Regulation 19(2)(b) of SCRA).

c.       An allocation to the Anchor Investors is made on a discretionary basis and subject to a minimum number of 2 such investors for allocation of upto Rs. 250 crore and 5 such investors for allocation of more than Rs. 250 crore. Company has a right to reject the Anchor Investor.

d.      One-third of the anchor investor portion is reserved for domestic mutual funds.

e.      The bidding for Anchor Investors opens one day before the issue opening date and allocation to Anchor Investors is completed on the day of bidding by Anchor Investors

f.        Anchor Investors is required to pay a margin of at least 25% on application with the balance to be paid within two days of the date of closure of the issue.

g.      If the price fixed as a result of book building is higher than the price at which the allocation is made to Anchor Investor, the Anchor Investor is required to bring in the additional amount. However, if the price fixed as a result of book building is lower than the price at which the allocation is made to Anchor Investor, the excess amount is not refunded to the Anchor Investor and the Anchor Investor takes allotment at the price at which allocation was made to it.

h.      The number of shares allocated to Anchor Investors and the price at which the allocation is made, is made available in public domain by the merchant banker before opening of the issue

i.        There is a lock-in of 30 days on the shares allotted to the Anchor Investor from the date of allotment in the public issue.

j.        Neither the merchant bankers nor any person related to the promoter/promoter group / merchant bankers in the concerned public issue can apply under Anchor Investor category. The parameters for selection of Anchor Investor are required to be clearly identified by the merchant banker and are made available as part of records of the merchant banker for inspection by the Board.

k.       The applications made by qualified institutional buyers under the Anchor Investor category and under the Non Anchor Investor category may not be considered as multiple applications.

Few years back, SEBI DIP guidelines allowed companies and merchant bankers to make discretionary allotment to the QIBs wherein company could pick and choose the institutions to whom they wanted to make allotment. However, subsequently, SEBI had replaced this discretionary allotment with the proportionate allotment. The introduction of anchor investor concept has to a certain extent reintroduced discretionary allotment.

Reason for introducing Anchor Investor concept

a.      Sets a rough benchmark / guideline for issue pricing and interest from QIBs

b.      Attracting investors to public offers before they hit the market to infuse a measure of confidence.

c.       Volume and value of anchor subscripttions may serve as an indicator of the company's reputation and soundness of the offer.

Anchor Investor vs. Angel Investor

Anchor Investor is different than the Angel Investor. 

An angel investor is a person with deep pockets and capacity to play the role of a venture capitalist. An angel investor or angel (also known as a business angel or informal investor) is an affluent individual who provides capital for a business start-up, usually in exchange for convertible debt or ownership equity. A small but increasing number of angel investors organize themselves into angel groups or angel networks to share research and pool their investment capital.

The anchor investor, on the other hand, is a bridge between the company and the public in the run up to an Initial Public Offer. Roping the anchor investor would ensure greater certainty and better price discovery in the issue process. If some investor is ready to come in with prior commitment, it enhances the issuer company’s ability to sell the issue and generate more confidence in the minds of other investors.

Anchor Investor vs. Pre-IPO placement

With introduction of Anchor Investor as a concept, pre-IPO placement will take a back seat.  Pre-IPO investment comes with one year lock-in, restrictive clauses and uncertainty in term of timing of the issue opening as well as pricing.  Investors prefer certainty, both for timing and pricing of the issue, which Anchor Investor provides more than what pre-IPO placement provides.  Given this, it is not surprising to see preference towards Anchor Investor as against pre-IPO placement.

Only QIB can be the Anchor Investor

In terms of the SEBI ICDR Regulations, QIBs are required to be allotted atleast 60% (or 50%) of the Net Offer to the Issue.  Further QIB are required to pay only 10% of the application money while bidding. Hence the issuer company is always at the risk of not getting required subscripttion from QIB and also the risk of withdrawing the bids by QIBs.

With the condition that Anchor Investor should be the QIB, SEBI has brought improvements upon the book building process. The regulations require that an anchor investor can be allotted not more than 30 per cent of the shares reserved for QIBs. Further unlike other QIBs who can contribute only 10 per cent as margin money, an Anchor Investor has to make an investment of upto 25 per cent with the application and follows it up with the remaining 75 per cent within two days of the closure of the public issue.

The introduction of anchor investor concept is welcome step for the companies going for initial public offering which will allow a company to give a firm allotment to a particular investor prior to the IPO. 

Source: https://www.taxmann.com/TaxmannFlashes/flaashart19-3-10_1.htm