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An IPO is a fantastic way to get ground-level access to an especially interesting company investment. Who can make an IPO investment, and what variations exist? Do the several investment groups have different rules and opportunities? There is a somewhat wide sector of IPO investing, and different types of investors have their chances and regulations applied correspondingly. This will help you identify which type of investors you fall under and so assist you in better negotiating the allocation procedure by an IPO and increase your opportunity to acquire shares in popular issues.
The four main types of IPO investors— Retail Individual Investors (RIIs), High Net-worth Individuals (HNIs), Non-institutional Investors (NIIs), Qualified Institutional Investors (QIIs), and Anchor Investors—will be discussed in this article. Simultaneously, we will also educate the reader on terms including retail investors in IPO, HNI IPO allocation, and the IPO allocation process for retail investors.
Retail Individual Investors, or RIIs, have always been the backbone of the IPO market, especially in terms of building interest and excitement for an initial public offering. This encompasses all the small investors-the common Indian citizen, NRI, and HUF, which combines for shares up to ₹2 lakhs.
Advantages of Retail Individual Investors:
In an IPO, the retail investor can place a bid for equity at the relatively small unit price thus making it accessible to the public.
At the cut-off price that the firm has set during the time of the IPO, retail investors can bid.
SEBI mandates a minimum allotment of 35% to retail individual investors. Thus, the possibility of RII getting an allotment becomes very high. But in case of oversubscription to any issue, then the procedure will consider a lottery for fair share distribution.
Retail individual investors can apply for several lots of shares, but the allotment of IPO to the retail investor is available on a lottery system basis if the demand outstrips the supply. Retail investors would be able to receive a portion of the allotment of the IPO in case of oversubscription of IPOs. However, it would be managed in such a way that every retail investor gets at least one lot in case it is possible.
The other categories are High Net-worth Individuals (HNIs) and Non-Institutional Investors (NIIs). It encompasses all such individuals or entities that invest more than ₹2 lakhs in an IPO, though unlike QIIs, they do not require SEBI registration. HNI meaning of the term in the IPO is normally divided into such rich individuals or entities that have the wherewithal to invest in big.
Advantages HNI/NII Investors:
As a High Net-worth Individual or Non-Institutional Investor comes with its advantages. The more shares you apply for, the more the allotment will be from the total investment.
In this category, the investors can withdraw an IPO application before the date of allotment if they feel that the demand may not be responsible enough to take the risk.
In the case of oversubscription, the HNI IPO allotment is proportionate. Assume you have applied for 10,000 shares and the issue is oversubscribed by ten times; then you would be allotted 1,000 shares (10,000/10). All these 15% of the IPO shares are generally kept for HNIs and NIIs, thus giving them quite a substantial share.
Qualified Institutional Investors include institutional entities such as mutual funds, commercial banks, public financial institutions, and FPIs. These are the big players in the IPO game, often accounting for the largest share of the offering. They buy in bulk, and underwriters count on them to meet capital targets.
Advantages of QIIs
QIIs purchase significant volumes of shares, and thus the company can generate a significant amount of funds from the underwriters. This allows underwriters to meet their financial objectives much earlier.
QIIs purchase in large volumes; thus, the time and money invested in selling shares to QIIs is less compared to retail individual investors.
SEBI specifies that no more than half of the allocation of an IPO can be made to QIIs so that the public and smaller investors are also offered a chance. QIIs are also subjected to a lock-in period for 90 days after the IPO to avoid selling shares immediately, which creates volatility.
Anchor investors are Qualified Institutional Investors, as brought into the market by SEBI in 2009. Those investors ensure to buy a big chunk of the IPO before it goes to the general public. Anchor investors create a buzz for an IPO by showcasing interest early, and they get the shares at a pre-concerted price.
Benefits of Anchor Investors:
Anchor investors will provide confidence to the issue and thus encourage more investors to participate.
Anchor investors can be allowed to pre-bid for one day before the issue is opened to the public.
The number of shares set aside for QIIs may be up to 60% allocated to the anchor investors.
Even though anchor investors belong to the institutional investor category, their prime strength lies in providing early access and being available exclusively. Their investment is mandatory at ₹10 crore, and their shares are compulsorily locked in for 30 days.
Be it an individual investor buying from the retail side or a high net-worth individual, an IPO can be an opportunity to get exposure to companies with potential high growth. Generally, the retail investors in an IPO are looking for long-term gains, whereas HNIs and institutional investors are more interested in quick money through price movements.
Understanding the various types of investors in an IPO is important for an investor who wants to participate in a public offering. Each type of investor—RIIs, HNIs, QIIs, and Anchor Investors—has its own set of rules, benefits, and allotment process. Whether it is an institutional investor or a retail investor with the first foot in the stock market, knowing your category will enhance your strategy for an IPO application and likely increase the chance of getting shares.
Research has to be thorough before every step of the IPO process-not only on the company itself but also on the financials and market prospects. Not all IPOs are a success; hence, proper knowledge will help you make the best investment choice.
If the issue is oversubscribed, retail investors’ allocation of the IPO proceeds sometimes like a lottery system. Given adequate shares, SEBI requires that every retail investor get at least one lot.
High Net-worth Individual, or HNI, in IPO jargon describes investors seeking shares valued more than ₹2 lakh. In the case of oversubscription, HNIs get corresponding allocation.
Anchor investors have to apply for shares worth at least ₹10 crore and bid for shares one day before the IPO opens to the public. Conversely, QIIs are limited to no more than 50% of the offer even though they can bid after the IPO opens.
Given the company has been profitable for the past three years, SEBI requires that at least 35% of the IPO shares go to Retail Individual Investors (RIIs).
With a lock-in period of ninety days, qualified institutional investors (QIIs) are unable to sell their shares right following the IPO listing, therefore lowering volatility.
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