Anchoring issues

Implications of the increasing role of anchor investors

Two recent public issues highlighted the increasing role of so-called anchor investors in the primary market. In the initial public offering (IPO) of Coffee Day Enterprises Ltd (CDEL), the holding company of the Cafe Coffee Day chain, the lead managers accepted "anchor" subscriptions of Rs 334 crore at a price of Rs 322 a share. The retail, high net worth individual (HNI) and employee quotas were under-subscribed but institutional over-subscription allowed a comfortable ride. CDEL eventually fixed an issue price of Rs 328 a share (the top end of the band of Rs 316-328). Hence, the anchors will actually be charged Rs 328 a share, paying a total of about Rs 340 crore for allotments. In the ongoing IPO of InterGlobe Aviation Ltd, the owner of IndiGo, the anchors have committed Rs 832 crore at Rs 765 a share, which is the top end of the issue band of Rs 700-765. Even if the issue is at a lower allotment price, the anchors will still pay Rs 765 a share.

The mechanics should be clear. Anchors are Qualified Institutional Buyers (QIBs) who commit a minimum bid of the value of Rs 10 crore to an IPO before the public issue opens. The anchors can be allotted a maximum of 30 per cent of the total issue size (60 per cent of the institutional segment). Allotment is at the discretion of the lead-managers, who may choose to allot nothing. If allotment price is higher than the anchor book price, the anchors pay the difference. If the allotment price is lower, anchors are nonetheless committed to pay the price they agreed. The anchor book data are released a day before the public offer and anchors are locked in for 30 days after the listing. The regulator created the concept of anchors in 2009. It recently relaxed the limit on the number of anchors permitted in a large issue, increasing it from an earlier maximum of 25 anchors, by slabs of 10 extra anchors for every additional Rs 250 crore offered in the anchor book. This lowers the average ticket size, and has been received well.

One underlying assumption is that QIBs have a better sense of valuation. The early-bird commitments should, therefore, impart confidence to other segments. Hence, enthusiastic bidding by anchors "should" lead to enthusiasm in other investor segments. In addition, the lock-in should result in lower price volatility immediately after listing. In practice, these assumptions may be challenged. QIBs can misjudge valuations and be blindsided by market movements since they often bid high on issues, which list at discount or lose ground soon after listing. Also, as the CDEL issue indicates, QIB oversubscription and anchor interest do not necessarily translate into interest from other segments. However, anchors have deep pockets by definition, and an active anchor book should imply better price discovery. Strong anchor bidding does offer comfort to lead managers, who also get a preview of possible market response to a given issue. Still, interactions among anchors, other QIBs and lead managers must be stringently monitored; information dissemination should not be skewed in favour of this segment.

The development of this class of investor could have important implications for disinvestment. Issues in public sector undertakings are frequently rescued at the last moment by government-controlled investment vehicles, such as LIC and SBI Mutual. The release of anchor book data, or indeed, the absence of an anchor book, would offer investors a better sense of broad demand for a given PSU. Analysts, retail investors and HNIs will probably track anchor activity closely before bidding in the primary market.