Initial Public Offerings (IPO)

  •  3 min read
  • 0
  • 12 Dec 2023
4 Different Types of IPO Investors

An Initial Public Offering, or IPO, marks a company's transition from a privately held entity to a publicly traded one. When a company files for an IPO, it is all set to make a share market debut. Its shares will be made available to the general public for the first time. Companies do so to raise capital by selling their new shares to the general public.

Under Securities and Exchange Board of India (SEBI) guidelines, four types of investors can bid for shares during an IPO process. These are:

  • Qualified Institutional Investors (QIIs)

Commercial banks, public financial institutions, mutual fund houses, and Foreign Portfolio Investors registered with SEBI fall into this category. Underwriters try to sell large chunks of IPO shares to them at a lucrative price before the start of the IPO. Selling shares to QIIs go a long way in helping underwriters meet the targeted capital. SEBI mandates that institutional investors sign a lock–up contract for at least 90 days to ensure minimal volatility during the IPO process. If QIIs buy more shares, fewer shares would be available to the general public. This would result in higher share prices. This scenario is ideal for a company because they want to raise as much capital as possible. However, SEBI has laid down rules to ensure companies do not distort the IPO valuations. The regulatory body prohibits companies from allocating more than 50% of shares to QIIs.

  • Anchor Investors

Any QII who makes an application of over ₹10 crore, is an anchor investor. Such investors typically bring in other investors as well. Up to 60% of the shares meant for qualified institutional investors can be sold to anchor investors.

  • Retail Investors

The minimum allocation under the retail quota is 35%. SEBI has decreed that if the issue is oversubscribed, subject to availability, all retail investors be allotted at least one lot of shares. If the one-lot-to-each-investor is not possible, a lottery system is used to allocate IPO shares to the public.

  • High Net-worth Individuals (HNIs)/Non-institutional Investors (NII)

Individuals looking to invest more than ₹2 lakh are categorised as HNIs. Similarly, institutions that want to subscribe for more than ₹2 lakh are called non-institutional investors. The difference between a QII and an NII is that the latter does not have to register with SEBI. The allotment of shares to HNIs/NIIs is on a proportionate basis, i.e., if one applies for 10,000 shares and the issue is oversubscribed 10 times, they would be allotted 1,000 shares (10,000/10). This means they are always allotted shares, regardless of whether the issue is oversubscribed or not. Typically, 1-2% of shares are earmarked for the employees as a way of awarding them for the risk they took in associating with a new company.

The Final Word

We have now covered the various points in understanding the flesh and bones of the IPO world, from understanding the importance of an IPO to learning how to bid for one.

Retail investors, high net-worth individuals (HNIs), and qualified institutional investors (QIIs) like banks, mutual fund houses, foreign portfolio investors (FPI), etc. invest in IPOs.

Yes, individual investors can participate in IPOs. Usually, every company launching its IPO allocates a certain amount of shares to the IPO for individual investors.

Enjoy Zero brokerage on ALL Intraday Trades
+91 -