SEBI Revamps IPO Anchor Investor Rules to Boost Domestic Institutional Participation

The Securities and Exchange Board of India (Sebi) has introduced significant amendments to the share allocation framework for anchor investors in initial public offerings (IPOs). This regulatory overhaul, set to take effect from November 30, aims to enhance the involvement of domestic institutional investors (DIIs) such as mutual funds, insurance companies, and pension funds.

Key changes include an increase in the total reservation for the anchor portion to 40% of the issue size, up from the previous 33%. This total reservation is now specifically divided, with 33% allocated to mutual funds and the remaining 7% designated for insurers and pension funds. A crucial provision states that if the 7% allocation for insurers and pension funds remains unsubscribed, the leftover portion will be reallocated to mutual funds.

Furthermore, Sebi has revised the limits on the number of anchor investors. For IPOs where the anchor portion exceeds Rs 250 crore, the maximum number of permitted anchor investors has been raised from 10 to 15 per Rs 250 crore. Specifically, allocations up to Rs 250 crore will now have a minimum of 5 and a maximum of 15 anchor investors, with a minimum investment of Rs 5 crore per investor. For every additional Rs 250 crore or part thereof, an additional 15 investors can be permitted. The previous distinction between Category I (up to Rs 10 crore) and Category II (above Rs 10 crore up to Rs 250 crore) for discretionary allotments under the anchor portion has been merged into a single category for allocations up to Rs 250 crore.

Impact: This move is expected to broaden the participation base for IPOs by attracting more long-term capital from domestic institutions. Increased anchor investor participation can lend greater stability to IPO pricing and demand, potentially reducing volatility and enhancing investor confidence. The focus on mutual funds and pension funds suggests a push towards attracting investors with a longer investment horizon, which can benefit companies going public by ensuring a more stable shareholder structure post-listing. Rating: 7/10

Difficult Terms: Anchor Investor: A large institutional investor that commits to buying shares in an IPO before the public offering begins. They help build confidence and price the IPO. Initial Public Offering (IPO): The first time a private company offers its shares to the public, allowing it to raise capital. Mutual Fund: An investment vehicle that pools money from many investors to purchase securities like stocks, bonds, and money market instruments. Insurer: An insurance company that provides financial protection against specific risks in exchange for premiums. Pension Fund: A pool of assets set aside to provide retirement income for a defined group of employees. ICDR Norms: Issue of Capital and Disclosure Requirements Regulations, which govern how companies raise capital from the public in India. Discretionary Allotment: The allocation of shares by the issuer or book-running lead managers based on their judgment, often to specific investors.