IPO as its name says is the process of offering shares of any company by the promoters of any private corporation to the general public for the very first time. It is well understood that a company issues its IPO means an initial public Offer to increase the number of shareholders and many investors will take part in the book-building process of an IPO. But do you know that different types of investors are there who invest their money into the shares of the company?
Angel Investors are those who invest in the idea rather than invest in the company and are the first ones who will invest with the promoter of the company in the initial phase of business when the company is not even making any earnings. As they are investing at the time when the company is starting its operation means there is no surety about the future of the company. Hence Angel investors take maximum Risks as Promoters when investing in any company.
Venture capitalists are those investors who invest in any company in its early stage but not in the beginning. Since they are investing when the company is successfully running business for two to three years, means they are quite sure about the future potential of the company. Hence VCs take fewer risks as compared to Promoters and Angel Investors But also invest more compared to Promoters and Angel Investors.
Retail Individual Investors (RII)
A retail investor is also known as an individual investor and is a non-professional investor who buys and sells securities/shares or mutual through brokers. RII will be buying the shares and funds from the money with his own savings account. In the case of an Initial Public Offering, any individual investor who is an Indian resident/NRI/HUF and applying for less than 2 Lakh for IPO falls under the RII category.
More than 35% of shares through the IPO Process are reserved for this category. RII investors have an additional option to apply for IPO at the Cut Off Price. Additionally, RII investors and Non-institutional investors can cancel or withdraw their bid at any time before the allocation of shares. The RII category also includes HUFs applying through their Karta and Eligible NRIs.
Non-Institutional Investors (NII)/HNI
Non-Institutional Investors are the ones who bid for shares for more than Rs 200,000 in an IPO and are not QIBs. It includes Resident Indian individuals, Eligible NRIs, HUFs, companies, corporate bodies, scientific institutions, societies, family offices, trusts, and FPIs who are individuals, corporate bodies, and family offices. Indian Residents, NRIs, HUF, Corporate Bodies, Societies, Companies, scientific institutions, and trusts who apply for shares worth more than 2 lakh, will fall under the NII category.
More than 15% of shares through the IPO process are kept reserved for this category of investors. Additionally, a High Net Worth Individual (HNI) who applies for a share of more than 2 lakh in IPO also falls under this category. This type of investor has no requirements to get registered with SEBI. Non-institutional bidders are permitted to cancel or withdraw their bids until the day of allotment same as the RII category. But NIIs are not eligible to bid at the cut-off price whereas RIIs can bid at the cut-off price.
Qualified Institutional Bidders (QIBs)
Public financial institutions, commercial banks, mutual funds, Foreign Portfolio Investors, etc can apply in the QIB category. SEBI registration is required for institutions to apply under this category and 50% of the Offer Size is reserved for QIBs in an IPO. QIBs are not allowed to cancel or withdraw their bids after closing the IPO while RII and NII’s can do this. QIBs are also not eligible to bid at the cut-off price. QIBs are mostly representatives of small investors who invest through mutual funds, ULIP schemes of insurance companies, and pension schemes.
As per SEBI followings institutions can apply under the QIB category: Mutual Funds, Venture Capital Investors, Foreign Venture Capital Investor registered with SEBI, Foreign Institutional Investor registered with SEBI, Insurance Funds set up by the posting dept, Insurance Funds set up by the military forces of India, National Investment Fund, Pension Fund (with at least 25 cr corpus), Provident Fund (with at least 25 cr corpus), Insurance Company, State Industrial Development Corporation, Scheduled Commercial Bank, Bilateral and International Development Financial Institution, Public Financial Institution as mentioned in section 4A of the Companies Act, 1956
Anchor investor is a concept launched by the Securities Exchange Board of India (SEBI) in 2009 and is an institutional investor who is invited to subscribe the shares before the Initial Public Offers (IPOs) open so that it boosts the popularity of the issue. An anchor investor in a public issue refers to a qualified institutional buyer (QIB) making an application for a value of Rs 10 crores or more through the book-building process.
An anchor investor can attract investors to public offers before they hit the market to boost their confidence. Up to 60% of the QIB Category can be allocated to Anchor Investors. The price of the offer for Anchor Investors is decided separately for Anchor Investors. Anchor investors are not eligible to bid at the cut-off price.
Foreign Institutional Buyers (FIB’s)
A foreign institutional investor is an investor in a financial market operating outside its nation. FII are not individual investors but fund houses like Mutual Fund houses, and investment banks that are investing in foreign markets. FIIs can include many tools into their investment basket-like pension funds, investment banks, hedge funds, and mutual funds. There are some restrictions imposed by some nations over their functioning with regard to the size of the investment.
FIIs are allowed to invest in India’s primary and secondary capital markets only through the country’s portfolio investment scheme. This scheme allows FIIs to purchase shares and debentures of Indian companies on the nation’s public exchanges If a mutual fund house in a foreign country eyes a high-growth investment opportunity in an India-listed company, it can take a long position by purchasing shares in the Indian stock market. This type of arrangement will also benefit private equity investors of that nation who may not be able to buy Indian stocks directly. Instead, they can invest in the mutual fund and take part in the high-growth potential.
Anchor Investor Portion
A part of the QIB Portion is allocated by the company to Anchor Investors on a discretionary basis. The Anchor investors could be any individual, company, or Mutual Funds. A 33% of the Anchor Investor Portion is reserved for Mutual Funds.
Employees & Shareholders
Present Employees and shareholders of the company are also sometimes invited to the bidding part of the company’s IPO. Some of the share portions are reserved for this category of investors. But it is an optional category and is used only by a few companies.
Investment in IPO can be a great tool for great returns but before that, you as an investor must have a thorough study of the company and its fundamentals. Because every time IPO investments are not proven to be positive for its investors and are opened up at discounted prices.