Know the 5 Types of Investors in IPO

7 min read • Published 27 February 2023
Written by Jatin Pareek

In the past few years, there has been an exceptional increase in the number of companies going public by launching Initial Public Offerings (IPOs). IPOs attract many investors from different realms of the stock market, with various types of investors applying for shares – some representing institutions while some are investing in an individual capacity. Keep reading to know about them.  

Types of Investors in an IPO

As new companies are coming up in every economic sector, the types of investors participating in primary market transactions are also changing significantly. There are different types of investors in India who are willing to invest their money in the IPO market, as SEBI sets no minimum limitation for investment. Here are the types of investors:

  1. Institutional Investor or Qualified Institutional Investor

Institutional investors invest other people’s money. They have much more money to invest in comparison to individual investors. Therefore, the decisions of institutional investors can hugely impact the prices of stocks. 

Mutual fund companies, pension funds, insurance companies, commercial banks, wealth managers, non-banking financial companies and foreign portfolio investors fall under this category. 

  • Companies take less time to issue shares to QIIs than public investors. 
  • Institutional investors have the ability and opportunity to hold onto their investments even after the 90-day lock-in period is over.  
  • Qualified institutional investors usually have access to more information about the company than the public. 
  • As they are investing on behalf of others, they are comparatively more disciplined about their investment decision. 
  •  It is more cost-effective as there is no need for huge teams of bankers, auditors and advocates to get approval. 

Institutional investors usually buy many lots of IPO shares. Therefore, underwriters always try to meet their targeted capital by selling as many IPO shares as possible to institutional investors at high prices. If more shares are sold to qualified institutional investors, stock prices will automatically increase, and the company can raise more money.

This will also mean that fewer shares will be available to the public. Therefore, according to the regulations of SEBI, institutional investors cannot be allocated more than 50% of the shares.

  1. Non-Institutional Investors (NIIs)

Non-institutional investors are typically smaller investors who do not have the same resources as more prominent institutional investors. They usually include Hindu Undivided 

Families, eligible NRIs, resident Indian individuals, large trusts and societies and big companies willing to invest more than ₹2 lakhs. Non-institutional investors are also known as High Net-Worth individuals.  

  • They have the privilege to withdraw their bid before the date of allotment. 
  • NIIs are also eligible to apply for more than ₹2 lakhs in IPO investments. 

These investors do not always have the same amount of money as institutional investors and do not need to register themselves with SEBI. They also do not possess as much information as institutional investors.

However, they are a valuable part of an IPO, so companies reserve 15% of the offer for them. NIIs help provide additional funds and create more interest in the company, but they are not eligible for bidding at the cut-off price.

  1. Retail Individual Investor (RII)

This is one of the most common types of IPO investors. They are known as retail investors as they invest for their personal reasons and not on behalf of large investors and corporations. 

This category includes resident Indians, NRIs and HUFs. Such investors can subscribe to shares valued lower than ₹2 lakhs. Companies reserve a minimum of 35% of the offer for individual retail investors.

In the case of oversubscription, as per the regulation of SEBI, every retail investor is allotted at least one lot of shares. If that is not possible, the company can use a lottery system to distribute shares to retail investors.

  • RIIs get an opportunity to be a part of a company with excellent future prospects from the beginning. 
  • These investors also get the chance to build a vast corpus with good returns in the long term based on dividends and bonuses issued by the company. 

It is worth noting that 35% of the offered quota applies only to companies that have registered a profit in the last 3 years. Those companies that do not conform to this can only allocate 10% to RIIs. The actions of retail investors influence the price of stocks the least.  

  1. Anchor Investor

Anchor investors are a type of institutional investors who commit to investing a large sum of money in any company when it plans to launch its initial public offering. These investors are usually well-established investment firms having a history of successful investments. Merchant bankers, direct relatives and promoters cannot apply under this category.

Their purpose is to provide stability to new issues. This ultimately helps in attracting more investors. As they commit to investing large sums of money, this acts as a signal to the market, with more investors getting influenced about investing in the IPO. This ultimately attracts other retail and institutional investors who might otherwise not be willing to invest in this company without the commitment from the anchor investor. 

These investors typically get favourable terms from the issuing company, like a lower price per share or additional shares unavailable  to other investors.

  • Anchor investors can apply for an IPO before the issue opens to the public. 
  • They help attract investors and help gain confidence before the IPO goes public. 
  • These investors have information about the company that the common people do not have. This helps them to invest wisely. 
  • Their level of engagement indicates whether or not it is a good investment. 

Qualified institutional investors who can invest at least ₹10 crores through the book-building process are also known as anchor investors. The company can sell up to 60% of the shares reserved for QIIs to anchor investors.

  1. Insider Investor

These types of IPO investors generally work for the company planning to launch the IPO and go public. They are employees or executives who have access to data about the company that others do not possess. If this type of investor buys or sells IPO shares, it will significantly impact the stock price.  

Final Words

When it comes to investment, not all investors have the capacity to invest the same amount. Investors have different needs and goals based on which they will prepare their strategy. Therefore, before you start investing in IPOs, you need to understand your requirements and goals, and based on that, you should plan your investment strategy accordingly.

Frequently Asked Questions

Is IPO grading mandatory and how does it help investors?

According to SEBI, it is mandatory for IPOs to get grading from at least one credit rating agency which is registered with SEBI. This grade indicates the company’s fundamentals, market comparison and future growth potential with other listed equities at the time of issuance. This is an additional tool and helps investors make better investment decisions.

Who are venture capitalists?

Angel investors are high net-worth individuals who invest in companies they find worthwhile investments. They invest their capital in companies which have the potential to grow and earn profits for them.

What is the difference between anchor investors and qualified institutional investors?

Unlike qualified institutional investors (QIIs), anchor investors are allowed to bid a day before the IPO issue opens. However, they need to apply for shares worth ₹10 crores or more. QIIs have a lock-in period of more than 90 days, but anchor investors have a lock-in period of 30 days

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Jatin Pareek

Investment Associate
Jatin is an Investment Professional in the making with expanding expertise in the debt and equity markets. He has completed his Bachelor of Technology in Civil Engineering from the Manipal Institute of Technology. He has helped build Wint Wealth in various capacities ranging from being a member of the Investor Relations Team to contributing actively at the Founder's Office. He has been an integral part of the Assets Team for about a year now.

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