SEBI had introduced the book building concept in IPOs in India in 1999 and, since then, it has gone through many changes in terms of reg­ulations and procedures. One of the changes evolved was the unique concept of anchor inves­tors, which was introduced for the first time in Indian markets in June 2009, to promote pri­mary market in a healthier man­ner. It set a reliable benchmark for the IPO price, since anchor investors are institutional inves­tors, whose understanding of a company would be much better than normal retail investors. Sec­ondly, anchor investors’ partici­pation increases the confidence level in’the IPO. “Before anchor investors coming in, most of the IPOs used to fill up during the last one hour of the third day of the IPO. Everyone was waiting to see who put the money first and at what price. But, with anchor investors coming in, the confidence of the investors at large got a boost and that set the IPO process rolling,” suggests Ashutosh Maheshwari, CEO, Motilal Oswal Investment Banking.

As per SEBI guidelines, anchor investors make a minimum applica­tion of ?10 crore in the offer; an allot­ment to anchor investors is made one day prior to the date of the issue open­ing. The merchant banker is supposed to inform investors at large who have been allotted shares as anchor inves­tors and at what price. The maximum percentage of the total offering that can be issued to anchor investors was revised as late as August 2014, where the limit was increased to 60 per cent of QIB (qualified institutional bidder), from the previous limit of 30 per cent. “The limit was increased from 30 per cent to 60 per cent, as per the demand from merchant bankers as also anchor investors,” adds Maheshwari.

Normally, 50 per cent of the IPO is reserved for QIB and, hence, anchor investors can technically subscribe to as high as 30 per cent of the total IPO size. Many companies made good use of this new revised limit, as many of the recent IPOs have seen 30 per cent of their quota exhausted by anchor investors. In other words, anchor investors are playing a crucial role in the success of IPOs, especially when many of the IPOs are finding it tough to garner retail investors’ appetite.

So, are anchor investors doing the job they are supposed to do? Are they setting a benchmark and also increas­ing the confidence level in IPOs? The data available suggests the contrary. Take Adlabs Entertainment, which went public recently. The company had first announced the price band at ?221-230 per share. As required by SEBI, the anchor investors’ allot­ment was finalised by the merchant
bankers one day before the issue opened. The shares were issued at ?221 per share, totalling ?60.50 crore, which amounted to 16 per cent of the total IPO size. Anchor investors have had marquee names like HDFC MF, Axis MF, L&T MF, Daiwa India Stock Active Mother Fund and IL&FS, >but their participation did not 5 excite retail investors, as many -S felt that the share price of the I IPO was aggressively set and, \ hence, the company did not gar- >ner even a one-time response | to its IPO, forcing it to not only * extend the IPO’s date but also reduce the offer price, which was announced at ?180-215.

Disappointing response

Despite the reduction in the IPO’s price-band, the company did not receive the response one would have expected it to get. It barely managed to scrape through. The company decided to allot shares at the lower end of the band – ?180 per share – clearly suggest­ing that the anchor investors did not help in terms of setting a benchmark price; nor did they help in terms of instilling confi­dence in the IPO. What is inter­esting is that the rule (unlike in the US, from where this concept has been borrowed) does not allow anchor investors to benefit from the lower price band. The SEBI rule clearly states that if anchor investors sub­scribe to an IPO at a price lower than the IPO’s discovery price, then they need to bring in additional money to match the higher price fixed by the company. But, if the company fixed a price lower than the price at which the anchor investors were allotted shares, then they don’t get any refund. So, even though Adlabs’ IPO price was fixed at ?180 per share, the cost of acquisition for the anchor investors remained same at ?221 per share. At present, the Adlabs shares are quoting at ?140 per share – down by 22 per cent from the IPO price and 37 per cent from the anchor investor price.

Another recent IPO was Orte! Com­munications, which saw anchor inves­tors subscribing to ?4 7 crore out of an IPO size of ?173 crore. Despite Axis mf and ICICI Prudential Insurance com­ing in as anchor investors, Ortel did not get even a one-time subscrip­tion to its initial plan to raise money and was forced to reduce its IPO size. In other words, the retail investors ignored the anchor investors’ faith in the company. Today, the scrip is quot­ing at ?169 – down by 7 per cent from its listing price. And it went as low as ?136 after the listing, creating panic among investors. Other companies that went public with anchor investor participation and are quoting below the offer price include Monte Carlo Fashions, MEP Infrastructure Devel­opers, etc.

But, its not that all IPOs, where anchor investors have to put money in, are in the red zone. One company, Inox Wind, where 30 per cent of the IPO was allotted to anchor investors, is handsomely up at ?420, as against its issue price of ?325. So, there is little clarity as to whether anchor investors help set the price or boost investors’ confidence.

But these are early days for anchor investors as, in India, the concept is still evolving. Also, after the 2008 market crash, not many issues have come to the market that extensively test the anchor investor model. Since March 2012, the highest amount raised through anchor inves­tors was in Bharti Infratel, where the anchor investors pumped in ?652 crore, help­ing the issue make good money for investors. The scrip is quoting handsomely – up from its IPO price.

While the anchor inves­tor concept is good, it has scope for improvement.

First, there has to be trans­parency in terms of the number of investors bid­ding in the anchor inves­tor category, and at what price they are coming in.

Today, anchor investors are allotted shares on a firm allotment basis, decided by merchant bankers, with
no clarity on who has bid for it and what criterion was adopted by the merchant bankers to allot shares to investor A, but not to investor B. While there is no report of merchant bankers misusing this discretionary allotment process, the same can’t be ruled out in the future. We are not
suggesting doing away with the dis­cretionary allotment, but infusing some transparency in the process.

Also, the SEBi rule, where the ben­efit of the lower price discovery is not passed on to the anchor investor, is a little harsh. We feel it should be done away with. Anyway, the anchor investor allotment comes with a 30-day lock-in period and, hence, there is no way they can play for any listing gains. While, at present, having anchor investors is not man­datory, it’s high time it is made so, when the book building issues are of more than ?100 crore.

Make it compulsory

Right now, the discretion rests with the merchant bankers and the compa­nies, who decide whether they will go for anchor investors or not. SEBI stipu­lates that in case a company decides to opt for anchor investors, then, based on the issue size, it has to set a min­imum and maximum limit for them – for example, if the issue size is less than ?10 crore, then there can be maximum of two investors; if the issue size is up to ?250 crore, then it can have a minimum of two and maximum of 15 anchor investors; and if the issue size is more than ?250 crore, then it can have a minimum of five and a maximum of 25 anchor investors, and so on. The reason for keep­ing a maximum limit is to ensure that an insignifi­cant stake is not issued to anchor investors.

We believe the anchor investor concept is good and, if the suggested changes are accepted, it can help many companies raise much needed funds from the primary market. The way QIB quota is mandatory in the book building pro­cess, anchor investors also must also be made compul­sory in the IPO market. Let’s hope SEBI will make such an amendment soon.

♦ SUNIL DAMANIA sunll.damania@businessindlagroup.com

 

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