2020 was a successful year for IPOs. Burger King, Mrs Bectors, Happiest Minds etc were heavily oversubscribed. The most popular IPO was the Burger King IPO which was oversubscribed 157 times!
Off the 157 times over subscription, the retail investor segment was oversubscribed only 68 times.
So, who are the other investors who subscribed to the Burger King IPO?
In today’s article, we will learn about the major types of IPO investors.
- Anchor investors
- Retail investors
- High net-worth individuals (HNIs)/Non-institutional investors (NII)
So, let’s get started!
Investor Types in IPO
As per the SEBI, there are four types of investors who can bid for shares during the IPO process.
QIIs are Qualified Institutional Investors. These include:
- Commercial banks
- Public financial institutions
- Mutual fund houses
- Foreign Portfolio Investors
QIIs are very important for a company who is coming up with an IPO. Underwriters try to sell large chunks of IPO shares to the QII’s at a lucrative price before the start of the IPO.
If the QIIs buy more shares, there would be a lesser number of shares available for the general public. This would result in higher share prices.
Through this method, the company can raise a huge amount of capital.
But, according to SEBI companies cannot allocate more than 50% shares to the QIIs.
Advantages of QIIs
1. The amount of time taken to complete the QII process is much less than issuing shares to the public.
2. It is cost effective as there is no need to use a large team of bankers, advocates and auditors to get approvals.
3. The QIIs have the ability and opportunity to buy large stakes in the company. Later they can sell their stocks at any point of time after the 90 days lock-in period is over.
(Note: 90 days lock-in period is applicable in the case of IPO)
2. Anchor Investors
Anchor Investors are Qualified Institutional Investors who can invest a minimum of 10 crores.
But, anchor investors have to buy shares at a fixed price. This makes other investors confident about the share and improves demand.
Up to 50% of the shares which are meant for QIIs can be sold to anchor investors as well.
Advantages of Anchor Investors
1. Anchor investors have detailed information about the company which is not available to common investors. so they invest in profit making organisations only.
2. The Anchor investors have to invest in the IPO one day before the subscription opens to the public. Larger participation from anchor investors provides an early signal to the market about the issue.
3. The Anchor investor type in IPO has its own reputation. Hence, institutions invest in quality issues to maintain their credibility in the market.
3. Retail investors
Retail investor type in IPO are investors whose application value is less than ₹2 lakhs. The minimum allocation for retail investors in an IPO is 35% of the total shares issued.
As per SEBI, in case of oversubscription, all retail investors should be allotted at least one lot of share. If one lot per investor is not possible, then a lottery system is used to distribute shares to retail investors.
Advantages of Retail Investors
1. An IPO is an opportunity to pick stocks and invest at a low price in the shares of the future industry. It provides valuable earnings by way of stock appreciation.
2. Based on the earnings of the company and the management, dividends or bonus is issued. As a result, retail investors can enjoy profits in the long term.
4. High net-worth individuals (HNIs) / Non-institutional investors (NII)
High net-worth investors are investors whose application value is more than ₹2 lakhs.
Institutions with subscription value of more than Rs 2 lakhs are called non-institutional investors (NIIs).
Around 15% of the offer is reserved for non-institutional investors in IPO.
The difference between a QII and an NII is that the NIIs does not have to register themselves with SEBI.
Non-institutional investors include:
- Resident Indian individuals
- Eligible NRIs
- Societies and trusts
Advantages of Non-institutional investors
1. NIIs can apply for more than Rs 2 lakhs in an IPO investment.
2. NIIs can withdraw from an IPO before the day of allotment.
However, the reserved allocation for NIIs is 15% i.e lower than Retail investors.
[Suggested Reading: IPO Investment Guide For Beginners]
In this article, we have learnt the 4 major investor types in IPOs. We have also covered their reserved share percentage and advantages.
These are some of the most common categories associated with every IPO. To increase your allotment chances, you must apply in the relevant category.
Also, not every IPO is worth investing and it’s important to do your homework before subscribing to an IPO.
Samco is awarded as the Best equity stock broker in India by CNBC Awaaz.
Invest diligently because, ‘Price is what you pay, Value is what you get.’
[Recommended reading: 10 Tips and Stratergies of investing in IPO]