What are the different Investor categories for IPO

Now that you've walked through the IPO procedure in India let's look at the different types of investors who participate in these offerings. Just as 'the early bird catches the worm,' participating in an IPO offers investors a unique opportunity to be part of a company's growth story right from its debut on the stock market. This initial offering allows investors to become shareholders at an advantageous price and plays a pivotal role in companies' growth strategies by raising capital. Over recent years, many IPOs have flourished in the market, attracting diverse investors keen to explore the stock market's potential while supporting promising enterprises. Each investor category, from institutional giants to individual retail investors, plays an important role in shaping the success of an IPO.

Let's explore these categories in detail and understand their roles and opportunities within the IPO ecosystem.

• Institutional Investors or Qualified Institutional Investors (QIIs):

Institutional investors, often referred to as Qualified Institutional Investors (QIIs), form an important pillar of the IPO ecosystem in India. This category includes commercial banks, mutual fund houses, public financial institutions, and foreign portfolio investors. When companies sell shares to QIIs during an IPO, it helps underwriters meet their capital targets efficiently, often at attractive prices. The higher participation of QIIs can lead to fewer shares being available for the public, thereby potentially driving up the stock price and allowing the company to raise more funds. To ensure fair distribution, SEBI mandates that QIIs cannot be allocated more than 50% of the shares. For QIIs, participating in an IPO offers several advantages:

• The process is quicker compared to public offerings.
• It's cost-effective as it involves fewer administrative hurdles.
• It provides the opportunity to acquire large stakes in the company.

However, QIIs must hold their shares for a 90-day lock-in period post-IPO before they can freely trade them.

• Non-Institutional Investors (NIIs)/ High Net Worth Individuals (HNIs):

Non-institutional Investors (NIIs), commonly known as High-Net-Worth Individuals (HNIs), represent one of the segments of participants in the Indian IPO market. These investors include individual high net worth individuals and institutional entities such as large trusts and corporate bodies that are willing to invest larger amounts, typically exceeding ₹2 lakhs, in an IPO. Unlike Qualified Institutional Investors (QIIs), NIIs are not required to register with SEBI before participating in an IPO. Companies typically allocate around 15% of the IPO shares specifically for NIIs/HNIs, ensuring they have the opportunity to participate meaningfully in the offering. One of the key advantages for NIIs is their eligibility to apply for higher investment amounts, often exceeding ₹2 lakhs per application. This flexibility allows them to potentially secure larger allocations and participate more actively in IPOs. Additionally, NIIs have the privilege to withdraw their application from an IPO before the allotment date if they choose to do so, providing them with additional flexibility and control over their investments.

• Retail Individual Investors (RIIs):

Retail Individual Investors (RIIs) form one of the largest and most accessible categories in the IPO market. This category includes individual investors, NRIs (Non-Resident Indians), and Hindu Undivided Families (HUFs) who are willing to subscribe for shares up to ₹2 lakhs. RIIs play an important role in the democratization of stock market participation. They are being offered the opportunity to become shareholders in companies right from their initial public offering. Companies typically reserve a significant portion, at least 35%, of the IPO shares for RIIs. It's important to note that this reservation can vary: companies with consistent profits over the past three years may allocate up to 35%, while those without such a track record may allocate only 10% to retail investors. RIIs have the advantage of bidding at the cut-off price during the IPO, simplifying the application process. This category also provides investors the chance to invest in companies they believe have strong growth potential from the outset. With an investment cap set at ₹2 lakhs per application, RIIs have the opportunity to build a portfolio with potentially rewarding returns over time.

• Anchor Investors:

Anchor Investors represent a specialized category introduced by SEBI in 2009 within the framework of Qualified Institutional Investors (QIIs). These investors play a crucial role in the IPO market by participating in the book-building process with applications amounting to ₹10 crore or more. Up to 60% of the shares reserved for QIIs can be allocated to anchor investors, excluding merchant bankers, promoters, and their immediate relatives from eligibility. Anchor investors enjoy several advantages, including the opportunity to apply for shares before the IPO is open to the general public. This early participation not only helps in securing initial investor confidence but also serves as a catalyst for attracting broader investor interest once the IPO goes public. Unlike regular QIIs, anchor investors bid one day before the IPO issue opens, allowing them to position themselves strategically in the market. Moreover, anchor investors are subject to a 30-day lock-in period, during which they cannot sell their allocated shares, ensuring stability in the stock price post-IPO. This category serves as a mechanism for companies to secure substantial commitments from institutional investors early in the IPO process, setting a positive tone for the public offering.

Conclusion

To conclude, we have explored the four main types of investors in IPOs: Institutional Investors, Non-institutional Investors/ High Net Worth Individuals, Retail Individual Investors, and Anchor Investors. Each category comes with its own set of reserved shares and distinct advantages. Understanding these categories is crucial for increasing your chances of successful allotment. By knowing which category suits your investment capacity and strategy, you can make more informed decisions. However, it's equally important to recognize that not every IPO is worth your investment. Thorough research and due diligence are essential before committing to any IPO. By staying informed and strategic, you can better understand the IPO investments and make decisions that align with your financial goals.

Happy Learning!