‘The early bird catches the worm.’
You must have heard this phrase before, which emphasizes the first mover advantage. An IPO is the best way to achieve this advantage in the Indian stock market. This is because it gives you the opportunity to become a shareholder of the company when it offers its shares to the public for the first time, and that too at an attractive price.
As IPOs help companies raise funds, among other benefits, thus, over the past few years, you can witness a tremendous increase in the number of companies going for an IPO. These IPOs have drawn a lot of investors to the stock market as they provide a good opportunity for novice investors to understand its basics while earning good returns.
There are different types of investors who can apply for shares during the IPO process. All these categories have a special reserve quota or a percentage of shares. IPO subscriptions are opened at different dates at different times for larger institutional investors as companies consider them as preferred buyers of shares. Let’s understand all these categories in detail.
Types of investors in an IPO
1. Institutional Investors or Qualified Institutional Investors (QIIs)
Commercial banks, mutual fund houses, public financial institutions, and foreign portfolio investors fall under this category. Selling shares to QIIs helps underwriters meet the targeted capital, thus, they try to sell them a large chunk of IPO shares at lucrative prices. If more shares are sold to QIIs, there will be less number of shares available for the public. This leads to an increase in the stock price, enabling the company to raise more capital. That’s why SEBI has mandated that QIIs cannot be allocated more than 50% of shares.
Advantages of QIIs
- Time taken to complete the QII process is less than issuing shares to the public
- Cost-effective as there is no requirement for a large team of bankers, advocates, and auditors to get approvals
- Ability and opportunity to buy large stakes in the company, however, they can sell their stocks at any point of time after the 90-day lock-in period is over
2. Non-institutional Investors (NIIs) / High Net Worth Individuals (HNIs)
Individual investors or institutions (large trusts, big companies, and similar institutions) who are willing to invest more than ₹2 lakh are categorized as High Net Worth Individuals or Non-institutional Investors respectively.
The major point of difference between QIIs and NIIs is that NIIs do not have to register themselves with SEBI. Generally, companies reserve 15% of the offer for NIIs/HNIs in an IPO.
Advantages of NIIs
- Eligible to apply for more than ₹2 lakhs in an IPO investment
- Privileged to withdraw from an IPO before the date of allotment
3. Retail Individual Investors (RIIs)
This is one of the most common categories for applying for an IPO. Any individual investor who is willing to subscribe for shares less than or up to ₹2 lakh belong to this category. Along with resident Indian individuals, this category includes NRIs and HUFs. Under this category, investors are allowed to bid at the cut-off price, and a minimum of 35% of the offer is reserved for RIIs. You must note that 35% of the quota is applicable only for those companies who have registered profits in the last 3 years, and the companies who fail to meet this criterion are allowed to allocate only 10% to retail investors.
Advantages of RIIs
- Chance to be a part of the company with good future prospects from the very start
- Opportunity to build a huge corpus with good returns
- Investment amount is capped at ₹2 lakhs
4. Anchor Investors
This new category of investors was introduced by the market regulator, SEBI, in 2009. It is a form of QIIs that can apply for an IPO for a value of ₹10 crore or more through the book-building process. Out of shares reserved for QIIs, up to 60% of the shares can be sold to anchor investors. Merchant bankers, promoters, and direct relatives are not allowed to apply under this category.
Advantages of Anchor Investors
- Opportunity to apply for IPO before the issue is open to the public
- Helps in gaining customer confidence and attracting investors before the IPO goes public
How are Anchor Investors different from QIIs?
- They are eligible to bid one day before the issue opens
- They will have to apply for shares worth ₹10 crore or more
- They are a subset of QIIs, thus, they will get a part from the allocation reserved for QIIs
- They have a lock-in period of 30-days
To conclude, we have learned that there are broadly four types of investors for IPOs – Retail Individual Investors (RIIs), Non-institutional Investors (NIIs) / High Net Worth Individuals (HNIs), Qualified Institutional Investors (QIIs), and Anchor Investors. Apart from this, we have also covered that each category has reserved shares and advantages. To increase your allotment chances, you must have a thorough knowledge of each category so that you can apply it in the most relevant one. Another important thing you must note is that not every IPO is worth investing in, so it’s important for you to do proper research before applying for an IPO.