IPO Investors

An IPO investor is a person or organization that purchases shares offered in an initial public offering of a company. Investors make this purchase with the expectation of making a profit. The process of buying IPO shares is very different from buying shares on the stock market. The company allot the shares within 7 days after the IPO closes.

IPO Investor Category

Each type of IPO investor has its own rules for IPO application, reserve ratio, and share allocation mechanism. Let us understand the types of IPO investors in detail.

1. Retail Individual Investors (RII)

Indian resident individuals, NRIs and HUFs who participate in an IPO with less than Rs. 2 lakhs fall under the retail investor (RII) category.

Investors in the RII category are allowed to bid at the cut-off price. They can also withdraw their bids while the issue is still open.

Allotment Basis for Retail Category

• If the IPO in the RII category is not oversubscribed, a full allocation will be made to all applicants.
• If the IPO in this category is oversubscribed, the allocation will be made by lottery and applicants will receive at least one lot regardless of how many lots they have applied for.

Example

1. An IPO A, the retail category is oversubscribed twice (by number of applications). 1 out of 2 applicants will receive 1 lot, regardless of how many shares they applied for.
2. In IPO X, investor A has applied for Rs 2 lakh (15 lots), investor B has applied for Rs 15,000 (1 lot) and investor C has applied for Rs 1 lakh (7 lots). If the IPO is subscribed three times in the retail investor category (based on the number of applications), the allocation will be done by lottery. Only one out of three applicants will be allotted a lot. It does not matter how many shares they have applied for. They will receive a maximum of 1 lot.

IPO Retail investor limit

A retail investor can invest maximum up to Rs 2 lakhs in an IPO. A retail individual investor could choose the NII category for an IPO application of more than Rs 2 lakhs.

Retail investor lock-in period

There is no lock-in period for retail investors in an IPO. Retail investors can sell their IPO shares as soon as they are listed for trading on the exchange(s).

Tips for Retail Investors in an IPO

• Always apply at the cut-off price in the retail category.
• If the IPO is oversubscribed, apply for only 1 lot per IPO application.
• To maximize allocation, apply for multiple accounts in your family member's name.

2. Non-Institutional Investors (NII)

The NII category is for Indian resident individuals, NRIs, HUFs, companies, corporations, academic institutions, societies and trusts. Their bidding for IPO shares has to be worth more than Rs 2 lakhs. Unlike QIB bidders, the non-institutional investor category does not require SEBI registration.

Any IPO individual investor bidding more than Rs 2 lakhs in the NII category is called a high net-worth individual (HNI). The NII category is also referred to as the IPO HNI category.

Non-institutional investors include HNI, HUF, Liability Partnership (LLP), Private Limited Company, Limited Company, Trusts etc.

NII Subcategory

NII or HNI category has two subcategories:

1. Small NII (bids below Rs 10L)

   NII investors who place bids for shares worth Rs 2 to 10 lakhs are called Small NII (sHNI or sNII). One-third of the shares in the NII category are reserved for sNII.

2. Large NII (bids above Rs 10L)

   NII investors who bid for shares worth more than Rs 10 lakhs are referred to as Big NII (bNII or bHNI). 2/3rd of the shares in the NII category are reserved for bNII.

IPO NII Allotment Process

1. sNII or sHNI Allotment Process
   • sNII IPO not fully subscribed: If the IPO in subcategory sNII is not fully subscribed (<1x), a full allocation will be made to all applicants.
   • sNII IPO oversubscribed: If the IPO is oversubscribed in the sNII sub-category (>1x), the allotment to each investor shall not be less than the minimum application size (~Rs 2 lakhs), subject to availability of equity shares in the sNII portion. In this case, a lottery will be conducted.

   This is similar to the allocation in the RII category. Instead of one lot, the sNII investor will receive shares worth the NII minimum application size. The NII minimum application size is just above Rs 2 lakhs.

   Example: If the IPO in the sNII sub-category is subscribed twice (in terms of applications), one out of two applicants will receive the sHNI minimum application. This is worth approximately Rs 2 lakhs, irrespective of how many shares they have applied for. Applicants will be selected through a lottery process.

2. bNII or bHNI Allotment Process
   • bNII IPO not fully subscribed: If the IPO in bNII sub-category is not fully subscribed, a full allocation will be made to all applicants.
   • bNII IPO oversubscribed: If the IPO in bNII sub-category is oversubscribed, the allotment to each investor shall not be less than the minimum NII application amount. This amount is worth approximately Rs 2 lakhs. It is subject to availability of equity shares in the bNII portion.
     
     This is similar to the allotment in the RII category. Instead of a lot, the bNII investor will receive shares worth the minimum application amount. The minimum application amount is approximately Rs 2 lakhs.
   • The investment amount limit for Big HNI is at least Rs 10 lakhs. But, in this case, the investors will receive shares worth Rs 2 lakhs on a lottery basis (same as small HNI).

NII Locking Period

There is no lock-in period for HNI and NII; they can freely sell their allocated IPO shares on the day of listing.

3. Qualified Institutional Buyer (QIB)

Qualified institutional buyers include

• Mutual funds,
• Commercial banks,
• Public financial institutions and
• Foreign portfolio investors.

QIB stands for a qualified institutional buyer registered with SEBI to invest in IPOs in the QIB category.

Most QIBs represent small investors who invest through mutual funds, ULIP schemes of insurance companies and pension schemes. QIB invests in large amounts in IPOs.

QIBs cannot withdraw their bids once made. For this reason, QIBs invest in an IPO on the last day of the subscription period.

Qualified institutional buyers include investors like LIC, Nippon India Mutual Fund, Goldman Sachs, Kuber India Fund, Elara India Opportunities Fund and BNP Paribas Arbitrage.

QIB Holding Period

There is no holding or lock-up period for IPO shares issued under the QIB category. QIB investors can sell them as soon as trading in the IPO shares begins on the stock exchanges.

However, there is a lock-in period for QIB investors who qualify as anchor investors .

4. Eligible Employees

The issuing company may reserve a portion of the public offering exclusively for its eligible employees. The eligibility criteria are explained in the prospectus document.

In most cases, the following employees are eligible to apply under the reserved employee category:

• Permanent or full-time employees of the Company, its holding company or a subsidiary working in India or abroad.
• Employees who are closely related to the full-time or part-time director.
• Employees who are closely related to the entity whose financial statements are consolidated with the issuer's financial statements.

IPO Employee Quota

The IPO prospectus document details the employee reservation quota and the discount (if any) offered to employees.

Under the regulations, the employee reservation quota for an IPO offering may not exceed 5% of the company's post-issue paid-up capital.

There is no specific investment limit for employees. However, to avail the employee discount (if any), the investment amount should not exceed Rs 2 lakhs.

Example: SBI Card IPO Employee Quota Explained

IPO Employee Benefits

An IPO issue benefits the employees of the issuing company in the following ways.

• Employees are given the opportunity to buy the stock at a discounted price. This can help them earn higher profits. Note: The discounted price should not exceed 10% of the price offered to other categories of investors.
• Employees feel motivated and proud to be part of the company going public. This happens as listed companies gain awareness and become a brand.

IPO Employee Lock-up

There is no lock-in period for shares purchased under the employee reserved category. Like retail investors, employees can sell their shares as soon as the IPO is listed on the stock exchange(s).

IPO Employee Discount

The IPO employee discount is a discount on the share price offered to eligible employees of the issuing company. To qualify for this discount, the employee must apply for the IPO under the employee reservation quota. The definition of eligible employees, the amount of the discount, and the rules vary by IPO and are explained in the RHP document.

5. Eligible shareholders

Some IPOs have a special reservation quota for eligible shareholders of the parent company. The IPO Prospectus Document contains detailed information on eligibility, bid limits, allocation criteria and other shareholder reservation rules.

In most cases, individuals and HUF shareholders holding the share on a given day are eligible for the shareholder reserve quota.

Read SBI Cards IPO Shareholders Application for more details.

Note: Bids under the shareholder reserve category are subject to the rules set by the issuing company. These are explained in the IPO prospectus document. These may vary depending on the IPO.

Advantages of the shareholder preference category in an IPO

• It increases the chance of allocation.
• Companies can provide an additional discount in this category.
• A shareholder can invest upto the total number of shares offered in the shareholders reserved category.
• Applicants in the shareholder quota are also eligible to apply in other categories such as retail and employee.
• The bid at the cut-off price is available for applications up to Rs 2 lakh.

Shareholder Quota Limits

A shareholder can invest up to the total shares offered in the shareholder reserved category. Some companies provide a discount on share prices for IPO applications up to Rs 2 lakh.

Lock-in period for shareholders

There is no lock-in period for shares purchased under the shareholder category. Like retail investors, shareholders can sell their shares as soon as the IPO is listed on the stock exchange(s).

6. Anchor Investors

Anchor investors are financial institutions that are allocated shares at a fixed price before the IPO is opened to the public. An IPO anchor investor must invest at least Rs 10 crore in a mainboard IPO and at least Rs 1 crore in a SME IPO. They have a lock-in period of 30 to 90 days from the date of allotment.

Rules for Anchor Investors

• Bidding for anchor investors begins one day before the start of the issue.
• Anchor investors cannot withdraw or modify their bids once placed.
• Anchor investors should pay the total bid amount at the time of application.
• Allocation to anchor investors will be completed on the same date of bid submission by anchor investors.
• Neither promoters/promoter group/trade bankers nor any person related to them can apply in the anchor investor category.

Role of the anchor investor in the IPO

• Higher subscription and higher number of applicants in the anchor investor category indicates greater confidence of institutional investors in the IPO.
• The presence of anchor investors confirms the authenticity of the IPO.
• Improves price discovery.

Anchor Investor IPO limit

• The minimum amount for IPO application by an anchor investor should be Rs 10 crores in Mainbaord IPO and Rs 2 Crore in SME IPO.
• 60% of QIB share can be allotted to anchor investors, with one-third of the share reserved for domestic mutual funds.
• An anchor investor may apply up to the total number of shares offered in the category reserved for anchor investors.

IPO Anchor Investor Lock-in Period

Shares purchased by anchor investors in the reserved anchor category are subject to a lock-in period of 30 days for 50% of the shares and 90 days for the remaining 50% of the shares from the allotment date.

IPO Date for Anchor Investors

The IPO offering for anchor investors begins and ends one day prior to the opening of the IPO to the public. Anchor investors have only one day to submit their bids. Allocation for anchor investors will also take place on the same day in the evening