Types of Investors Eligible to Participate in an IPO

Investing in an Initial Public Offering (IPO) could be a good way to enhance your financial portfolio. Not only does it help meet long-term goals, but it could also generate profits within a short duration. With better price transparency, you can purchase them at cheaper rates.

 

Many investors are drawn towards IPOs since these investment avenues have the potential to provide high returns. There are many categories of investors that can invest in IPOs.

There are guidelines that govern the different types of investors for an IPO. Find out more about them: 

1. Retail Individual Investors (RIIs)

These are the most common investors in IPOs. Here are some of their characteristics:

• These are small individual investors willing to buy IPO shares not worth more than ₹2 Lakhs

• This category includes individual Indian residents, Non-resident Indians (NRIs), and Hindu Undivided Families (HUFs)

• As an RII, they could own shares in an organisation with good growth prospects right from the start

• Investors may accumulate a large corpus with high returns over time

• Option to bid at the cut-off price as a minimum of 35% of the offer is reserved for RIIs

• The 35% allocation applies only to companies with profits in the last 3 years, and companies failing to meet this criterion can only allocate 10% to retail investors

• According to SEBI regulations, all retail investors are ensured allocation of at least one lot of shares, subject to availability, in case of oversubscription

• An IPO share allocation lottery system is used if providing one lot to each investor is not feasible

2. Non-institutional Investors (NIIs)

These are individual investors that invest more than ₹2 Lakhs in an IPO. 

• This category includes High-Net-worth-Individuals (HNIs), individual companies, trusts, and organisations

• HNIs have net investable assets of more than ₹5 Crores

• As per SEBI regulations, companies listing their IPOs in the primary market must reserve 15% of the shares for such investors

• These investors need not register with SEBI and have the privilege of withdrawing from an IPO before its allotment date

• Shares are allocated to HNIs and Non-institutional Investors on a proportional basis, meaning they receive shares regardless of oversubscription

• 1-2% of shares are reserved for employees as recognition when they join a new company

3. Qualified Institutional Investors (QIIs)

Commercial banks, Asset Management Companies (AMCs), Public Financial Institutions (PFIs), and Foreign Portfolio Investors (FPIs) fall under this category. Check out some attributes of these investors:

• These investors park huge sums of money in IPOs and stay invested for the long term 

• Underwriters aim to meet targeted capital by selling a significant portion of IPO shares to QIIs at attractive prices

• Increased allocation to QIIs reduces the number of shares available to the public, increasing the stock price and helping the company raise more capital

• The purchase of shares by such investors can have a significant bearing on its issue price

• As per SEBI norms, 50% of the allotment of shares is to be reserved for Qualified Institutional Investors

• These investors can buy large stakes in a company and sell the stocks once the 90-day lock-in duration is complete

4. Anchor Investors

An anchor investor is a sub-category under QIIs, launched by SEBI in 2009. Here are some essential characteristics of these investors:

• These investors can invest more than ₹10 Crores through the book building process

• Of the total shares reserved for QIIs in an IPO, 60% can be given to anchor investors

• Promoters, merchant bankers, and their immediate relatives are ineligible to apply under this segment

• These investors get access to IPO applications before the issue

• This type of investment boosts customer trust and draws interest ahead of the IPO's public launch