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What Is The Meaning Of Anchor Investors

The financial world is filled with terms and definitions that investors must be aware of and learn about, not just to facilitate effective investment, but also for the sake of knowledge in the sector. Anchor investor meaning becomes important to grasp for investors who may be interested in IPO investment. Furthermore, knowledge about anchor investors helps investors to understand certain nuances of IPO investment in general. 

What do anchor investors do?

An anchor investor is also called a “cornerstone investor”. Anchor investor meaning becomes clear if you know what an anchor investor does and the role they play. An anchor investor plays a vital role in initial public offerings or IPOs. This may not be an unfamiliar term to those who are actively involved in the listing of an upcoming IPO, but it is somewhat confusing for regular retail investors. 

An anchor investor is an institutional investor who participates in an IPO of any company. An anchor investor provides stability to any IPO, as far as the price is concerned. Examples of anchor investors include mutual funds, FPIs (foreign portfolio investors) and insurance firms subscribing to shares before an IPO is open to the public for subscription. 

The term “anchor investor” has to do with the role that such an investor plays. An anchor investor means that just as an anchor steadies a ship, an anchor investor is employed by a merchant banker to bring stability to an IPO. Anchor investors play a major role in the process of price discovery as they place huge bids. These indicate the interest from institutional investors in any IPO. 

Anchor Investor Meaning - Some Basics

The SEBI, or the Securities and Exchange Board of India, is the regulatory authority which has been established within Section 3 of the SEBI Act of 1992. The regulatory body is responsible for the protection of the interests of investors in securities. The SEBI also plays a key role in the promotion, development and regulation of the market of securities. Regarding anchor investors, the SEBI describes them as QIBs, or qualified institutional buyers who must apply for shares of a minimum worth of Rs. 5 crores in an IPO. According to the Securities and Exchange Board of India, anchor investors have to apply a day before any IPO opens for subscription to the public. 

How does SEBI view anchor investors?

While no formal definition of an anchor investor has been introduced by the Securities and Exchange Board of India, the entity does provide a framework for deciding the maximum number of anchor investors. This is what the SEBI states: 

  • An anchor investor means two or more investors who may allocate capital up to Rs. 10 crores to an IPO. 
  • If more than two anchor investors partake in any IPO, the maximum number is 15. In such cases, the maximum capital allocation may be up to Rs. 250 crores. However, this is subject to a capital allocation of shares worth Rs. 5 crores for each anchor investor. 

The Role of an Anchor Investor in an IPO

In the process of any IPO, anchor investors play key roles. Their roles are summarised as mentioned below:

  • The Discovery of Price - Anchor investors place huge bids in an IPO. This helps price discovery and reflects the interest of institutional investors in the said IPO. 
  • A Boost to Investor Confidence - Successful IPO subscription depends on investor confidence enabling investors to invest more in the IPO. When anchor investors allocate capital to any IPO, this gives investors a boost to invest, telling them that the IPO is credible and stable. 
  • The Offering of Stability in Price - When anchor investors allocate funds to an IPO by buying shares, they agree to hold these shares for a minimum of 30 days. This is a commitment that aids in mitigating the pressure of selling by retail investors once the issue is listed. 

Anchor investor meaning gets all the clearer once you know what anchor an investor does for the benefit of an IPO once it is introduced. Furthermore, the existence of anchor investors drives higher subscriptions and it typically attracts retail investors and HNIs to the IPO subscription. 

Anchor Investors Matter

As you can see, the presence of anchor investors matters and they serve important purposes in the Indian markets, both primary and secondary. Given their size, anchor investors often give the impression of exerting an undue advantage in investment, but there are some restrictions that these investors face. For instance, holdings cannot be sold for a month, even though the value of the investment may decrease. From the point of view of retail investors, the presence of these investors in the share market acts as a boon. Anchor investors do a lot to reduce the price volatility that comes with freshly listed shares. Effectively, this is a shield for smaller investors who try their hand at the stock market. 

 

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