Initial public offerings or IPOs are a popular way for companies to raise capital from the public. IPOs are extremely common in the Indian stock market, too.
If you are about to open a trading account, you should check the list of upcoming IPOs by going to a financial website because it can provide you with an opportunity to invest.Apart from knowing the upcoming IPO, you should also be aware of the types of IPO investors.
Four Types of IPO Investors in India
1. Qualified Institutional Investors (QIIs)
This is one of the most prominent categories of investors who subscribe to IPOs. The investors who fall under this category include mutual fund houses, commercial banks, public financial institutions, and foreign portfolio investors that are registered with the Securities and Exchange Board of India (SEBI).
The regulator, SEBI, does not allow companies to allocate more than 50% of shares being offered in an IPO to QIIs. Let us say that QIIs are allowed to be allocated more than 50% shares.
That will reduce the number of shares for general investors; besides, it will also increase the price of shares for them. Hence, SEBI does not allow companies to allocate more than 50% shares to QIIs.
2. Anchor Investors
Those QIIs who invest at least ₹10 crores in an IPO are called anchor investors. These are institutional investors who provide a commitment to purchase a considerable portion of an IPO before it is opened to the public. The involvement of such large investors provides a degree of confidence to IPO-issuing companies, as it also encourages other investors to subscribe to an IPO.
3. Retail Investors
The investors who apply for less than ₹2 lakhs worth of shares in an IPO are called retail investors. SEBI requires that a minimum of 35% of the total shares of an IPO be allocated to retail investors.
If an IPO is oversubscribed, each retail investor has to be allotted at least one lot of shares. However, if that is not possible, then a lottery system is used. Retail investors are extremely important to an IPO. For a stock market to have adequate depth, it is important that the general public invests in IPOs.
4. Non-Institutional Investors (NII) or High Net-Worth Individuals (HNIs)
If an individual invests more than ₹2 lakhs in an IPO, he is considered an HNI investor. On the same lines, if an institution subscribes to more than ₹2 lakhs worth of shares in an IPO, it is considered an NII. It is important to note that no one checks the net worth of an individual to categorise him as an HNI investor.
Instead, this categorisation is based on the amount of shares he is willing to subscribe to in an IPO. You may wonder how an NII is different from a QII. While a QII has to register with SEBI, an NII does not have to do so.
This category of investors is allotted shares on a proportionate basis. Suppose an HNI applies for 10,000 shares in an IPO, which gets oversubscribed 5 times.
In this case, the HNI will be allotted 2,000 shares (10,000 divided by 5). No matter to what extent an IPO is oversubscribed, HNIs/NIIs are always allotted shares. However, the number of allotted shares depends upon the extent of oversubscription.
Conclusion
When it comes to learning about the types of IPO investors, you must try to understand the objective of each category of investor. That will give you an insight into their thought process and help you become an informed investor.
Before bidding for an IPO, you should know how many shares are expected to be allotted to various categories, which will help you place your bids. Besides, you should always keep an eye on the list of upcoming IPOs.