Market regulator recently came out with major initiatives with respect to primary market. To make them vibrant and increase demand, it enlarged the base of anchor investors to include insurance companies and pension funds.
The Securities and Exchange Board of India (SEBI) said that in last five years, India’s capital markets have witnessed significant growth, supported by a robust regulatory framework and increasing investor participation across all categories.
The IPO market, in particular, has evolved with rising deal sizes, deepening institutional interest, and growing retail involvement through both direct applications and mutual funds (MFs). The average IPO size on the main board has increased, with even the smallest IPOs typically exceeding ₹300-₹500 crore.
Operational concerns
Following operational concerns raised by market participants, the regulator has relaxed the rules for anchor investors.
The limit on number of permissible anchor investor allottees based on the size of allocation has been increased, mainly to allow participation of foreign portfolio investors (FPIs).
FPIs had complained that since each FPI fund required a unique PAN, and since PAN was the identifier for each investor, it was a constraint on different FPI funds (with the same beneficial ownership) to invest through anchor portion.
For anchor allocations above ₹250 crore, SEBI has increased the permissible number of anchor investors from 10 to 15 per ₹250 crore or part thereof. Besides, it merged Category I and II alternate investment funds (AIFs), so that all anchor allocations up to ₹250 crore permit two to 15 investors, with minimum allotment of ₹5 crore per investor.
It may be mentioned that the treatment of FPIs is different compared to MFs where schemes of a fund are considered as a single application for allotment, given MF has one PAN.
Insurance, Pension funds
Besides, SEBI has also enhanced norms so that life insurance companies and pension funds can participate in the anchor book by allowing life insurance companies registered with Insurance Regulatory and Development Authority of India (IRDAI) and pension funds registered with Pension Fund Regulatory and Development Authority (PFRDA) to participate in the anchor portion under domestic mutual funds category. The quota for MFs has increased from 33 per cent to 40 per cent in an IPO so that the two long-term institutions can participate in the IPO.
These proposals are welcome as it will help improve participation of large FPIs with multiple funds and reduce artificial constraints in anchor book. Expanding the institutional investor base, no doubt, will provide much needed flexibility in anchor investor structuring, and boost participation of stable capital sources in alignment with best global practice.
However, it seems SEBI has temporarily shelved the proposal to cut retail quota in large IPOs (in excess of ₹5,000 crore) from 35 per cent to 25 per cent. SEBI said that decision was taken after reviewing the responses and examining alternative measures.
The concerns of large issuers would be addressed in a broader manner by reducing the minimum dilution requirement at the time of IPO, without necessitating any changes to the existing IPO allocation framework (retail quota a 35 per cent).
SEBI can revisit the norms once again and may consider a gradual reduction from 35 per cent to 30 per cent and 25 per cent over the period, given the large upcoming IPOs such as Tata Capital, LG Electronics and the National Stock Exchange.