4 Types of Investors in an IPO

Post Date : December 28, 2024

4 Types of Investors in an IPO

Investing in an Initial Public Offering (IPO) is one such opportunity in the stock market which allows you to become a shareholder of a company during its very first public offering—often at a competitive price.

In recent years, there has been a remarkable surge in the number of companies going public through IPOs. These opportunities have not only attracted seasoned investors but also provided a great starting point for beginners to learn about the stock market while potentially earning impressive returns.

During the IPO process, different types of investors can apply for shares, with specific quotas or percentages reserved for each category. Institutional investors often get early access as companies view them as preferred buyers. Let’s dive into these categories and understand their unique characteristics.

1. Institutional Investors or Qualified Institutional Investors (QIIs)

Institutional investors like commercial banks, mutual fund houses, public financial institutions, and foreign portfolio investors fall under this category. Selling shares to QIIs helps underwriters meet the targeted capital. Underwriters often offer them a large chunk of IPO shares at attractive prices.

If more shares are sold to QIIs, fewer shares are available to the public, often driving up stock prices and enabling the company to raise more capital. SEBI mandates that QIIs cannot be allocated more than 50% of the total shares.

Advantages of QIIs

• The time taken to complete the QII process is shorter compared to public issuance.
• Cost-effective since there’s no need for a large team of bankers, advocates, or auditors.
• Opportunity to buy large stakes, with flexibility to sell stocks after a 90-day lock-in period.

2. Non-Institutional Investors (NIIs) / High Net Worth Individuals (HNIs)

This category includes individuals or institutions willing to invest more than ₹2 lakhs. Large trusts, big companies, and similar institutions fall under NIIs, while individual investors in this range are termed HNIs.

Unlike QIIs, NIIs do not need to register with SEBI. Companies typically reserve 15% of the IPO offer for NIIs/HNIs.

Advantages of NIIs

• Eligible to invest more than ₹2 lakhs in IPOs.
• Privileged to withdraw from the IPO before the date of allotment.

3. Retail Individual Investors (RIIs)

RIIs form the most common category of IPO applicants. Any individual investor subscribing for shares worth up to ₹2 lakhs falls under this category. This includes resident Indian individuals, NRIs, and Hindu Undivided Families (HUFs).

Investors in this category are allowed to bid at the cut-off price. Companies must reserve at least 35% of the offer for RIIs, provided they have registered profits in the last three years. For companies that don’t meet this criterion, only 10% can be allocated to retail investors.

Advantages of RIIs

• Chance to invest in companies with strong future prospects from the very beginning.
• Opportunity to build significant wealth over time with good returns.
• Investment amount is capped at ₹2 lakhs, making it accessible to smaller investors.

4. Anchor Investors

Introduced by SEBI in 2009, Anchor Investors are a subset of QIIs that can apply for IPOs valued at ₹10 crore or more through the book-building process. Up to 60% of the shares reserved for QIIs can be allocated to Anchor Investors. Merchant bankers, promoters, and their relatives are not eligible under this category.

Advantages of Anchor Investors

• Ability to apply for shares one day before the issue opens to the public.
• Their involvement boosts investor confidence and attracts public interest in the IPO.

How are Anchor Investors Different from QIIs?

• Eligible to bid one day before the IPO issue opens.
• Must apply for shares worth at least ₹10 crore.
• They are a subset of QIIs, drawing from the allocation reserved for QIIs.
• They have a 30-day lock-in period for their shares.

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Disclaimer Investments in the securities market are subject to market risks. Read all related documents carefully before investing. This content is for educational purposes only and does not constitute financial advice.