Abstract
In the contemporary Initial Public Offering (IPO) rush, Retail Individual Investors (RIIs) have rapidly indulged into the Securities Market and have substantially raised the number of RIIs in the Covid era. However, retail investors do not have the awareness of the Lock-in period of Anchor investors who are allotted shares one day before the IPO opens for a subscription. This paper attempts to understand the lock-in period of anchor investors and its effect on share prices when the lock-in period expires, which further affects the small retail investors. This paper would also indulge in the amendments brought in by the Securities and Exchange Board of India (SEBI) to increase the lock-in period in order to decrease share volatility among other factors.
Introduction
Anchor investors were primarily initiated by SEBI in 2009 wherein the underwriters were authorized to allot shares to designated anchor investors to obtain pre-IPO price discovery.[2] These investors are a sub-set of institutional investors and are greatly understood via Schedule XIII, Regulation 10 of SEBI (Issue of Capital and Disclosure Requirement) Regulation, 2018 [SEBI (ICDR)], wherein the mandatory allocation requirements, maximum and minimum numbers of anchor investors, proportion reserved for mutual funds, among several others requirements are mentioned. However, the main goal of the paper is to understand the effect of the Lock-in period on anchor investors, their approach towards companies, and the reason why SEBI is proposing to extend the lock-in period.
Retail’s confidence
In case an issuer proceeds under Regulation 6(1) of SEBI (ICDR) and considers its association with Anchor Investors, the issuer has to conform allocation of the net offer to Qualified Institutional Buyers (QIBs) that must not be less than 50% of the total issue. Whereas, for the issue proceeding under Regulation 6(2) of SEBI (ICDR), the issue must allocate not more than 75% to Qualified Institutional Buyers (QIBs) while also having other reservations. Among QIBs, as per Schedule XIII Regulation 10 of SEBI (ICDR), up to 60% of the allocation is available to Anchor investor(s) while 1/3rd of such allocation is reserved for domestic mutual funds.
For retail investors, under Regulation 6(1) of SEBI (ICDR), not less than 35% of the net offer must be allocated whereas, for Regulation 6(2) of SEBI (ICDR), not less than 10% of the net offer must be allocated. The reason why these requirements were mentioned is that anchor investors are offered shares one day before the offer opens for public issue where they agree to buy shares at a fixed price which in turn notifies other investors. In generic terms, there is a demand for the shares offered[3] which in turn, naturally induces confidence in retail investors about the company as institutional investors have more knowledge about the company, its prospectus, and the fundamentals of the company among other factors as compared to retail investors.
The concept of retail investors’ confidence is also understood through the comparison between Anchor-backed IPOs and Non-Anchor-backed IPOs, and why Anchors backing up an IPO had induced confidence in RIIs. Certain sub-elements of such comparison being how Anchor backed-IPOs have greater proceeds that Non-Anchor IPOs, they tend to have more reputed underwriters as compared to Non-Anchor backed IPOs, are of better quality, one element of which is derived from higher IPO grade as compared to Non-Anchor backed IPO as well as the preference they acquire from institutional investors when its Anchor-backed, however, this confidence seems to be dwindling for RIIs given the shift in the approach taken by anchor investors which indeed affects retail investor’ confidence as well as their pockets.
For instance, Zomato’s share prices fell 8% after the end of the 30-day lock-in for anchor investors while experiencing little recovery[4] and a similar scenario for Paytm share prices which fell as much as 13.4% recouping to 7.72% at a price of Rs. 1,380 where the original offer price was Rs. 2,150.[5] However, it isn’t the market-related factors that are to be considered at the moment, rather the anchor’s intention at the time of backing up an IPO.
Anchor’s intent
The share price declination is not the issue, the major issue is that like any investor, it seems that anchor investors are also aiming for a “quick-buck”. The main intention doesn’t revolve around the “long-term perspective” of a company rather the anchor investors subscribe to those companies where factors like brand value, reputation, and the status quo of the market are in consonance with Anchor’s possible profit at the exit.
For instance, no investor would be willing to bet its investments if the probability of future market is dull or in a downtrend[6], but it is evident how Indian markets have been consistently doing better with the record-breaking amounts raised via public through IPOs[7] as well as the massive surge in retail investors in 2021.[8] Hence, creating a scenario where anchor investors would back an IPO without considering whether or not it has strong fundamentals or other long term prospects, rather more about how they can exit right after the lock-in period ends while only thinking about profiting while leaving retail investors with uncertain future as it would be retail investors who would have to bear the unpredictability of the share prices in the long run and to observe whether the company’s share prices experience any recovery.
This unpredictability is diluted when the fundamentals of the company are strong and transparent wherein, the recovery of share prices is imminent, however, the time taken for the share prices to recover is always uncertain, clinging to several market-related factors which have the potential to agitate retail investors for an undetermined time.
SEBI’s Proposal and Conclusion
Anchor investors may exit for several reasons and may also not have a strong interest in the long-term view of stock[9] and are there to make a quick exit as soon as the lock-in period ends, however, SEBI’s new norms for increasing the lock-in period would induce more stability in share prices because even though lock-in period of 30 days did protect investors from sudden fluctuations post-listing, it still fluctuates substantially at the end of the lock-in period hurting smaller retail investors[10] as was observed in Paytm, Zomato as well as in Nykaa’ IPO.[11] This may also mean that Anchor Investors would now have to take into consideration medium to long term view of the company as well, which would further bring confidence back to the RIIs or at least give them the assurance that an institutional body is backing the company for a longer time thereby, more probability that the respective company had good fundamentals among other factors.
On 28th Dec 2021, SEBI amended the lock-in period of anchor investors and increased it to 90 days wherein the existing lock-in period would continue for 50% of the portion allocated to anchor investors whereas the other 50% would have a 90-day lock-in period and it must also be noticed that this decision was taken after observing Zomato and Paytm’s share price’s nosedive[12] keeping in mind anchor’s intent, retail’s confidence, and share price volatility and it seems that its high time the plight of retail investors is understood given that, even though they may not have a lot of capital to invest, the sheer surge of RIIs in Covid era is one of the major reasons why so many companies were comfortable on pushing towards public issuance hence, RIIs was one of the major key elements of record-breaking IPOs was enhanced market participants which is why key aspects like RIIs should not bear the brunt of a step taken by anchor investors.
[2] Amit Bubna & Nagpurnanand Prabhala, Initiative for the study in Indian Capital Markets 3-4 (January 18, 2014)
[3] Rajalakshmi Nirmal, All you wanted to know about Anchor Investors (2nd Nov, 2015) https://www.thehindubusinessline.com/opinion/columns/all-you-wanted-to-know-about-anchor-investors/article7834116.ece.
[4] ET Bureau, Zomato Falls over 8% as Lock-in period for Anchor Investors Ends, Economic Times (Aug 24 2021, 09:46 AM IST) https://economictimes.indiatimes.com/markets/stocks/news/zomato-falls-over-8-as-lock-in-period-for-anchor-investors-ends/articleshow/85574587.cms?from=mdr.
[5] Reuters, Paytm Shares Slide as anchor investors’ lock-in period expires, Economic Times (Dec 15 2021, 04:50 PM IST )https://economictimes.indiatimes.com/tech/startups/paytm-slides-as-anchor-investors-lock-in-period-expires/articleshow/88291039.cms.
[6] Jayant Raghu Ram, Concept of Anchor Investors in the Indian Capital Markets Social Science Research Network 26 (Company Law Journal 23 April 2011) https://ssrn.com/abstract=1815374.
[7] ET Bureau, At Rs. 1.19 Lakh Crore in 2021, IPO Bounty breaks all past records, Economic Times(30 December 2021, 03:38 pm IST) https://economictimes.indiatimes.com/markets/ipos/fpos/at-rs-1-19-lakh-crore-in-2021-ipo-bounty-breaks-all-past-records/articleshow/88464188.cms.
[8] ET Contributors, Is this the Era of the Retail Investors, Economic Times (Oct 24 2021, 01:07 PM IST) https://economictimes.indiatimes.com/markets/stocks/news/is-this-the-era-of-the-retail-investor/articleshow/87236474.cms?from=mdr.
[9] Nikhil Walavalkar, Lock-in Period for Anchor Investors of recent IPOs ends: Should you buy these stocks now? Money Control (Dec 23 2021, 09:37 IST) https://www.moneycontrol.com/news/business/personal-finance/lock-in-period-for-anchor-investors-of-recent-ipos-ends-should-you-buy-these-stocks-now-7817941.html.
[10] India today, Explained: What is an IPO Lock-in Period for Anchor Investors, India Today (Dec 16 2021, 12:41 PM IST) https://www.indiatoday.in/business/story/explained-what-is-ipo-lock-in-period-for-anchor-investors-1888450-2021-12-16.
[11] Pawan Nahar, Nykaa Anchor Lock-in Period Ends Today; Stock Down 21% From Record High, Economic Times (Dec 08 2021, 12:52 PM IST) https://economictimes.indiatimes.com/markets/stocks/news/nykaa-anchor-lock-in-period-ends-today-stock-down-21-from-record-high/articleshow/88160931.cms.
[12] ABP News Bureau, SEBI Clears Various Amendments, Extends Lock-in Period of Anchor Investors to 90 Days, Anand Bazar Patrika (28 Dec 2021, 05:32 PM IST) https://news.abplive.com/business/sebi-clears-various-amendments-extends-lock-in-period-of-anchor-investors-to-90-days-1502695.
