The launch of an IPO is a collective effort of various parties involved like the companies who are the issuers of the IPO, other intermediaries, and participants like merchant banks, syndicate members, underwriters, depositaries, and stock exchanges. But to determine if the IPO is a success or a miss is in the hands of investors. Each IPO has a defined class of target investors and the percentage of shares that can be subscribed by them is reserved and duly mentioned in the Offer Document. Investors study the pros and cons of the IPO and accordingly make an investment decision if the IPO meets their desired parameters. So who are these investors? And to what extent can they invest in the IPO? Discussed hereunder are the answers to these questions.
What is an IPO?
An IPO is the Initial Public Offer wherein the shares of a company are listed on the stock exchanges for the first time. As the IPO will attract investments from a diverse class of investors, SEBI has levied stringent rules and regulations that have to be followed by companies to be eligible for an IPO. These rules are imposed to safeguard the interest of all investors, especially the retail investor class.
What are the categories of buyers in an IPO?
Now that we know the basic meaning of IPO and the application process, let us now understand each class of investors who are eligible to apply for the IPO. As per the rules of SEBI, there are 4 categories of investors who can apply for an IPO, and the percentage that is reserved for them is also defined. Given below are the details of the same.
- Qualified Institutional Investors
Qualified Institutional Investors (QII) are the dominant category of investors in an IPO. The investors in this category can be mutual funds, foreign portfolio investors, public financial institutions, and commercial banks. The price band for this category of investors is different from other categories and underwriters aim to sell more shares in this category by making it more lucrative.
When more shares are bought by the QII category of investors, it helps the underwriters meet their target subscription more easily. Hence, they aim to sell more shares in this category but as per SEBI rules, allocation to this category of investors cannot be more than 50% shares of the IPO. To reduce the volatility of shares in the market, SEBI mandates that there needs to be a lock-up contract of at least 90 days. The time taken for the allocation of shares to the QII category is lower as compared to the general public. It also provides the QII category of investors an opportunity to buy a larger stake in the company which is cost-effective too.
- Non-Institutional Investors (NIIs) / High Net Worth Individuals (HNIs)
This is the second category of investors who can invest in the IPO for shares worth more than Rs.2,00,000. The eligible investors under this category are NRIs, Individuals, HUFs, and large investors like trusts, companies, etc. These investors do not have to register themselves like the QII category of investors. The maximum allocation for this category of investors is usually 15% of the IPO. The allotment of shares to this category of investors is on a proportionate basis depending if the IPO is oversubscribed or undersubscribed.
- Retail Institutional Investors (RIIs)
The retail investors are the general public (including NRIs, and HUFs) that wish to invest in the IPO and the eligible investment is capped at up to Rs. 2,00,000. As per SEBI guidelines, a minimum of 35% of the IPO is allocated to this category of investors if the company has recorded profits for the past 3 years. In case a company fails to meet this criterion, the allocation to this category of investors is 10% of the IPO. Investors in this category are permitted to bid for shares at cut-off prices and if the IPO is oversubscribed, all the applicants in this category will be allotted shares on a proportionate basis. Investing in the IPO is a good opportunity for retail investors to be part of a company with a good growth trajectory and opportunities for short-term and long-term gains.
- Anchor Investors
This is a subcategory of the QII investors and was introduced by SEBI in 2009. As per SEBI guidelines, 60% of the quota of QII investors should be towards anchor investors. Anchor investors can invest Rs.10,00,00,000 or more through the Book Building process and they have a lock-in period of 30 days. Some examples of anchor investors are mutual funds, banks, provident funds, etc.
How to apply for an IPO?
Investors can apply for these IPOs through registered brokers or designated banks through online or offline modes. Under the online mode, investors will need to have a valid and active Demat account along with a registered mobile number and a bank account linked to the same.
Investors can login to their account and click the link to the desired IPO to invest in the same. They will also have to select the investor category and the number of lots that they wish to apply for. Once the application is successfully submitted it will be verified and the allotment will begin after the IPO is closed. The allocation basis is different for every company and will depend on how much the IPO is subscribed. Once the shares are allotted to the investors, the same will be reflected in their Demat accounts.
On the other hand for offline investment mode in the IPO, investors will have to get the physical IPO application form from their brokers or designated banks and submit back a duly filled form. The application will then be vetted and post allotment shares will be credited to the Demat account of the investors.
The different types of investors that can invest in the IPO are clearly defined in the Prospectus. The chances of allotment are increased when investors subscribe to the IPO in the relevant category. An IPO that has a good buzz backed by strong financials will be preferred by larger investors and will also be a good opportunity for retail investors to increase their corpus and returns over the long-term investment horizon.
The maximum allocation for QII investors in an IPO is restricted to 50% of the total IPO size.
Retail investors (Resident Individuals, NRIs, and HUFs) can bid in the RII category and the HNI/ NII category depending on the amount to be invested by them. If the amount of investment is above Rs. 2,00,000, investment can be in HNI/ NII category as the chances of allocation are increased.
NII category of investors are not eligible to bid at cut-off prices.
As per SEBI guidelines, no promoters, their relatives, or merchant banks are permitted to invest in the anchor investors category.