India’s initial public offer (IPO) market has evolved over the years, from when the issue price was set by a government body called the Controller of Capital Issues to now where investors bid in a book-built issue to determine the price. Now, Sebi has made the arena a little more interesting, by introducing anchor investors. It has amended the public issue guidelines to allow promoters to bring on board anchor investors, who will commit to the issue in advance, lending some stability to the issue and sending price signals to other investors too.
The price discovery process of a public issue can be a very chaotic process. News leaks routinely emanate from companies on price sensitive developments. The promoters will deny it on record quoting a silent period rule but will not outright deny the development either. Real or imagined grey market premiums (the price at which yet to be allotted shares change hands) will be dropped by friendly bankers.
And, investment bankers leak over-subscription data when the issue is open, hoping to attract other investors. Then, stuffing the book with willing institutional investors who know they will not get an allotment is another tactic to make the book look healthy. The entire exercise has two broad purposes: create so much interest that the issue is oversubscribed at the highest price possible and then keep the hype alive to ensure a massive premium on listing.
Retail investors typically wait till the last one or two days to decide on what price to bid at. Hence, the hype plays a crucial even if misleading role. An anchor investor may help reduce this hype. These investors will pay an upfront margin of 25%. They will bid for shares one day before the issue opens, are free to discover the price without any price band, and winning bidders will be announced on the same day. When the issue opens, investors will know the price and number of shares that have been reserved for anchor investors. The shares will be locked in for a month after allotment, to ensure they do not dump shares on listing.
But a key factor that differentiates anchor investors from other reservations, is that the allotment can be discretionary. This leaves scope for misuse as promoters and investment bankers may use this to favour their preferred investors. In the past too, discretionary allotments have been frowned upon by the regulator. Some limits on minimum investors have been specified, to ensure cornering does not happen. Still, the numbers are few and the lock-in period is too short to have any meaningful impact on post-listing behaviour of a stock.
Some Key features of the Anchor Investor proposal:
- It is optional for an issue to have anchor investors, who can bid for up to 30% of the issue reserved for qualified institutional investors (usually 50%). They will get a 15% share and one third of this, or 4.5%, is reserved for Indian mutual funds.
- Sebi wants to encourage this for large issues only. The minimum investment by one investor has to be Rs 10 crore and there have to be at least two investors for an issue up to Rs 250 crore. The minimum issue size will have to be a little over Rs 130 crore, assuming 50% of the issue is reserved for qualified institutional investors.
- Anchor investors bring some certainty to an issue. When they bid for shares at a certain price, and commit a 25% margin (versus 10% normally) they are sending a signal of confidence.
- They may even subscribe for shares at a rate higher than the book-building price range. They would be willing to pay a premium to get a large block of shares.
- The Sebi circular is silent on whether anchor investors can pull out of the issue, before it closes. That will be detrimental to investors unless they are informed well in advance that anchor investors have changed their mind.
- Anchor investors are needed for small as well as large issues. Sebi’s fear may be that smaller issuers may manipulate this rule to their advantage but the threshold of about Rs 130 crore seems a little high.
The anchor investor’s offer price will set a benchmark for the final issue price. But will it mean the end of manipulation of price expectations? It may limit the scope even if it does not completely eliminate it, depending on how How it works in practice. Sebi has tried to minimise scope for manipulation by preventing people related to the promoters or issue managers to be anchor investors.
Allowing anchor investors to withdraw from an issue is not a good idea. If anchor investors bid for a price even higher than the book-built price range, it may send misleading signals too. Instead, Sebi could capped the offer price at the same level for all investors, but lock anchor investors in for longer than a month.
Apart from investors, two key parties in the process are the promoters and the investment bankers. Their approach to the process will determine if raising money is driven more by the fundamentals of the issue than the ability of the promoters and investment bankers to manage expectations. The latter is a simpler option to asking for a price that is justified by the fundamentals of the company. The concept of an anchor investor may become just another embellishment in the IPO process.