Types of Investors in IPO

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When a company’s IPO comes, many people subscribe to it. These bidders can be individuals or institutions.

Among individual investors, they may be wealthy corporates or they may be people who cannot invest a lot, but have a small portion of their savings. Individuals can be residents of India or can be non-resident Indians or investors from abroad.

If an institution is investing in an IPO, they may be organizations that invest on behalf of other smaller investors or they may be institutions such as trusts. These institutions may be located domestically i.e. in India or may also be from abroad. They may or may not be registered with SEBI.

So, you can say that a lot more people and entities invest in an IPO. But how can we classify them into investor categories?

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There can be many investor categories in an IPO but the investors are broadly classified under the following categories:

RII (Retail Individual Investor)
HNI (High Networth Individual) or NII (Non-institutional Investor)
QIB (Qualified Institutional Buyer/Bidder) or QII (Qualified Institutional Investor)
Anchor Investor

RII

Any individual who invests up to Rs 2 lakh in an IPO is known as RII, i.e. RII can bid for shares of less than Rs. 2 lakh.
Resident Indians, NRIs and HUFs (Hindu Undivided Families) who invest less than 2 lakh rupees fall under this category.
At least 35% of the total issued shares are reserved for the RII category. For example, if the company is issuing 100 shares in the IPO, at least 35 shares must be reserved for RIIs.
RII can bid at the cap price.
RII can bid at the cut-off price.
RIIs can revise or cancel their bids before the closing of the IPO.
In the case of a highly oversubscribed IPO, it isn’t sure that every individual, who bid under the category of RII, would get an allotment of shares as the allotment to the RIIs has been done on a lottery basis.

HNI / NII

Any individual who invests more than Rs 2 lakh in the IPO is known as HNI and any institution that isn’t registered with SEBI & invests more than 2 lakh rupees in IPO is known as NII.
NRIs, HUFs, individuals who invest more than 2 lakh rupees & corporates fall under the category of HNI and the companies, trusts and societies (which aren’t registered with SEBI) count as NII.
Minimum 15% of the total issued shares are reserved for HNI and NII categories. For example, if the company is issuing 100 shares in the IPO, at least 15 shares must be reserved for HNIs & NIIs.
HNIs & NIIs can’t bid at cap price.
HNIs & NIIs can’t bid at the cut-off price.
HNIs & NIIs can’t cancel their IPO bids but they can revise (only increasing the price is allowed) their bids.
Shares are always allotted to HNIs and NIIs irrespective of whether the issue is oversubscribed or not, as the allocation to this category is done on a proportionate basis.

QIB / QII

Any institution registered with SEBI qualifies as a QIB for investing in IPOs.
All public financial institutions, commercial banks, foreign portfolio investors, foreign institutional investors (FIIs) mutual funds, insurance companies, pension funds and other similar entities are examples of QIBs.
A maximum of 50% of the total issue can be allotted to QIBs; not more than that. For example, if the company is issuing 100 shares in the IPO, a maximum of 50 shares can be issued to the QIBs.
QIBs can’t bid at cap price.
QIBs can’t bid at the cut-off price.
QIBs can’t cancel or modify their bids.
They are always allotted shares, regardless of whether the issue is oversubscribed or not as the allotment to the QIIs is also done on a proportionate basis.

Anchor Investor

Any QIB, who bids for shares for more than Rs 10 crore, is an anchor investor i.e. Anchor Investors are QIBs who can invest a minimum of 10 crores.
Up to 60% of the shares meant for QIBs can be sold to anchor investors. For example, if the company is issuing 100 shares in an IPO, the maximum number of shares that can be issued to QIBs is 50 and out of these 50 shares, up to 60% i.e. 30 shares can be issued to anchor investors.
Allotment of shares to the anchor investors is done a day before the IPO opens. It means that they have different Bid/Offer periods and the Offer price is decided separately for them.
Anchor investors have to invest in the IPO a day before the IPO opening date and they have to buy the shares at a fixed price.
Anchor investors are especially important for a company launching an IPO. This is because underwriters offer them IPO shares before the price discovery in the stock market. If anchor investors buy more shares, a smaller number of shares will be available to other categories of investors. This will increase the share prices. This scenario is ideal for a company as they want to raise as much capital as possible.
Investment banks, promoters, and their immediate relatives are not eligible to bid under this category.

Reserved categories of Investors in IPO

As you know the main categories of investors are only 4 which are RIIs, HNIs, QIBs, and Anchor Investors. But apart from these categories, the issuer also reserves a part of the offer for the following people:

Employees of the company. (Can’t invest more than 5 lakh rupees in the IPO)
Existing shareholders of the company.
Persons who, as of the date of filing the DRHP with the SEBI, are associated with the issuer as depositors, bondholders, or subscribers to the company’s services.