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SEBI Notifies Norms for Anchor Investors in Public Offers

SEBI Notifies Norms for Anchor Investors in Public Offers

Why in News?

  • Capital market regulator Securities and Exchange Board of India, or Sebi, on Thursday amended its disclosure and investor protection guidelines to include the concept of anchor investors in initial public offerings (IPOs) through the book-building process, which is used to determine the issue price.
  • With an aim to boost fund raising through primary markets, capital markets regulator the Securities and Exchange Board of India (SEBI) has notified relaxed norms for public offers by removing restriction on maximum number of anchor investors.
  • The present regulation limit the number of anchor investors at 15, if the public issue size is under Rs.250 crore and this can increased to 25 if the issue size is over Rs.250 crore.
  • The requirement for the number of anchor investors for allocation of up to Rs.250 crore will remain the same but for issues above that size there could be 10 additional investors for every additional allocation of Rs.250 crore, subject to minimum allotment of Rs.5 crore per anchor investor.

What is anchor investor?

  • An anchor investor in market parlance refers to a qualified institutional buyer (QIB) making an application for a value of Rs.10 crore or more through the book-building process
  • Since equity markets are volatile, experts say that companies going for IPOs benefit from anchor investors.
  • Anchor investors attract investors to public offers before they hit the capital markets to infuse confidence, they say. The volume and value of anchor subscriptions serve as an indicator of the firm’s soundness of the offer. It also sets a benchmark and gives a guideline for issue pricing and interest among QIBs.

What is book-building process?

  • When a company wants to raise money , it plans on offering its stock to the public. This typically takes place through either an IPO or an FPO (follow-on public offers). The book building process helps determine the value of the security.
  • Once a company determines it wants to have an IPO, it will then contact a book runner or a lead manager. The book runner will determine the price range it is willing to sell the stock. The book runner will then send out the draft prospectus to potential investors.
  • Generally, the issue stays open for five days. At the end of the five days, the book runner determines the demand of the stock for its given price range. Once the cost of the stock has been determined, then the issuing company can decide how to divide its stock at the determined price to its bidders

What is an IPO?

  • Initial public offering(IPO) or stock market launch is a type of public offering in which shares of stock in a company usually are sold to institutional investors that in turn, sell to the general public, on a securities exchange, for the first time. Through this process, a private company transforms into a public company.
  • Initial public offerings are mostly used by companies to raise the expansion of capital, to possibly monetize the investments of early private investors, and to become publicly traded enterprises. A company selling shares is never required to repay the capital to its public investors.
  • After the IPO, when shares trade freely in the open market, money passes between public investors. Although IPO offers many advantages, there are also significant disadvantages, chief among these are the costs associated with the process and the requirement to disclose certain information that could prove helpful to competitors. The IPO process is colloquially known as going public.

Question:

"Indian security market is witnessing liberal reforms with improved investor protection". Do you think SEBI's recent step to ease allotment norms for Anchor Investors in Public Offers is a step in this direction? Justify your answer.

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