When a company decides to go public and sell its shares for the first time, it does so through an Initial Public Offering (IPO). This allows everyday people and large organisations to become part-owners of the company by purchasing its shares.
However, not everyone invests in an IPO in the same way. Investors are divided into different groups based on their investment amounts and affiliations. Each group has its own rules, benefits, and share limits during the IPO process.
Understanding these categories helps investors know how to apply and what to expect. In this article, we will explore the four main types of investors in an IPO.
Different Types of IPO Investors
Now that you have a basic understanding of IPOs let's move forward. Here are some common types of IPO investors with different investment goals and reserved quotas.
Retail Individual Investors (RIIs)
RIIs or Retail Individual Investors are quite common types of investors in IPO applications. Generally, these are individual IPO investors with an investment that is comparatively smaller than the other institutional or big investors. Individuals subscribing to shares worth ₹2 lakhs or less than the same fall in this category.
In addition to resident individuals, this category also includes Non-Resident Indians (NRIs) and Hindu Undivided Families (HUFs). Further, RIIs may bid at the cut-off price, and the minimum allocation quota for them is reserved at 35%. However, it is also important to understand that only the companies that have been able to register profits over the last three years are eligible to allow 35% to retail investors. For the others who aren't able to adhere to these criteria, the companies can just offer 10% to RIIs.
Benefits of RIIs
The smaller investment amount allows even investors with low-risk tolerance and limited access to capital to be a part of the IPO application.
Helps you be shareholders of companies with potential growth and future prospects.
Allows you to build a good investment amount generally.
Non-Institutional Investors (NIIs) / High Net Worth Individuals (HNIs)
Other common categories of investors in IPOs are non-institutional buyers or high net-worth individuals. Any individual who is willing to invest or subscribe to shares worth more than ₹2 lakhs can be seen as high net-worth individuals or HNIs. Similarly, institutions or big companies capable and willing to subscribe shares worth more than ₹2 lakhs are termed as non-institutional buyers or NIIs. What makes NIIs different from qualified institutional buyers or QIBs is that the NIIs need to be registered with the Securities and Exchange Board of India (SEBI).
The share allocation to these types of IPO investors is done on a proportional basis, meaning they are generally awarded shares irrespective of their oversubscription or not. Typically, 15% of the IPO offer is reserved for NIIs or HNIs.
Benefits of NIIs/HNIs
Qualified Institutional Buyers (QIBs)
Qualified Institutional Buyers or QIBs include commercial banks, foreign portfolio investors, mutual funds houses, and public financial institutions. Each of these is registered under the SEBI. Underwriters aim and try to sell more and more shares to these QIBs as they help them raise the targeted funds.
However, if more and more shares are simply sold to QIBs, it will reduce the general shares available to the public. In fact, it may also lead to an increase in share prices. For this purpose, SEBI restricts companies not to allocate more than 50% of the offer to qualified institutional buyers.
Benefits of Qualified Institutional Buyers
The processing time for QII application is generally lesser than that of share issuance to the general public
Qualified Institutional Buyers can buy and invest in bigger stakes in the company. Further, they can also sell their shares anytime they feel once the lock-in period of 90 days is completed.
IPO application for QIBs is also cost-effective. Why, you ask? Well, there is no need for bankers, auditors, and other entities for approvals, which reduces the extra costs here and there.
Anchor Investors
Anchor investors are a new type of IPO investors introduced by the SEBI in 2009. These can be simply understood as investors who have the opportunity and commit to buying a specific IPO portion before it is available to the general public. This also helps companies earn the trust and confidence of the customer before going public. The involvement of anchor investors makes the IPO offering look more stable and encourages the participation of other investors in the IPO application.
Generally, anchor investors are offered a fixed share allotment at a pre-set price. Anchor investors are nothing but a category of qualified institutional buyers willing to make investments worth more than ₹10 crores in an IPO application. 60% of the shares reserved for QIBs can be offered to anchor investors.
Benefits of Anchor Investors
Anchor investors get the opportunity to bid before the IPO application is opened for the general audience.
Helps attract customers' trust and attention and other investors to the IPO.
Have a quota reserved from the allocation quota of qualified institutional buyers.
Anchor investors can apply for large stakes of more than ₹2 crores.
The lock-in period is comparatively shorter than QIBs. Anchor investors have a lock-in period of just 30 days.
Comparison of IPO Investor Categories
Investor types in IPO applications differ based on their capital, allocation, and much more. Here is a table for you to take a quick glance at and understand the different categories of IPO investors.
Investor Types
| Features
| Objectives
| Investment Size
| Reserved Quota
| Risks
|
Retail Individual Investors
| Includes Individual investors, resident individuals, NRIs, and HUFs with generally limited capital access.
| Willing to earn from future prospects and increase returns from the company's potential and growth opportunities.
| The investment size is comparatively smaller than other categories of IPO investors. Retail investors are willing to subscribe for up to ₹2 lakh worth of shares.
| Companies are supposed to reserve 35% of their IPO process for retail individual investors.
| These generally have limited risks because of smaller investments and capped regulations.
|
High Net-Worth Individuals/Non-Institutional Investors
| Includes high-net-worth individuals and other big non-institutional investors with flexibility in the investment limit.
| Willing to enhance returns and earn from strategic gains of potential companies.
| The investment size is comparatively larger and is also flexible. It may vary based on the capacity of the investors. Investors are willing to make investments of more than ₹2 lakhs.
| Typically, 15% of an IPO offer is usually reserved for NIIs/ HNIs.
| They are prone to risks coming from market fluctuations and other regulatory barriers.
|
Qualified Institutional Buyers
| Includes commercial banks, public financial institutions, foreign portfolio investors, and mutual funds houses, that are registered with SEBI.
| It helps companies raise targeted funds and can also increase share prices.
| The investment size is fairly large, helping companies secure adequate funds. And thus, underwriters aim to sell more and more shares to these QIBs.
| Companies cannot reserve and allocate more than 50% of the IPO offer to qualified institutional buyers.
| Have to be considerate of market volatility, future growth, and flexibility.
|
Anchor Investors
| Includes institutional and big investors with enough resources and access to capital.
| Offers stability and helps companies attract other investors and customers with improved trust and confidence.
| The investment size made by anchor investors is comparatively larger and significant. They are qualified Institutional buyers who can invest more than ₹2 crores in an application.
| Typically, 60% of the shares reserved for QIBs can be offered to anchor investors.
| Have a lock-in period, and the flexibility is also limited.
|
Additional Read: How to Invest in an IPO Online
Who Is Eligible for Investing in IPOs?
To invest in an IPO, individuals and organisations must meet certain eligibility requirements. These rules ensure transparency and fairness in the share allotment process.
1. Basic Requirements
Permanent Account Number (PAN): Every investor must have a valid PAN card to verify identity and comply with tax laws.
Demat Account: IPO shares are issued only in electronic form, so a demat account is required to hold and trade them.
Bank Account with ASBA Facility: The ASBA (Application Supported by Blocked Amount) system allows banks to block the amount in your account when you apply. The funds are debited only if shares are allotted, making the process secure.
KYC Compliance: All investors must complete the Know Your Customer (KYC) process by providing valid ID, address proof, and other details.
2. Eligible Applicants
Resident Individuals: Any Indian citizen aged 18 or above with the required accounts can apply.
Minors: They can invest through a guardian-monitored demat and bank account.
Non-Resident Indians (NRIs) and Overseas Citizens of India (OCIs): Eligible to invest if the company’s offer document allows their participation.
Institutions and Corporations: Mutual funds, banks, and companies can apply under institutional categories.
3. Investor Categories
Retail Individual Investors (RIIs): Can invest up to ₹2 lakh in an IPO.
Non-Institutional Investors (NIIs): Invest above ₹2 lakh.
Qualified Institutional Buyers (QIBs): Large financial institutions with specific registration.
Therefore, anyone with a valid PAN, a demat account, an ASBA-linked bank account, and KYC compliance can invest in IPOs, provided they follow category- and company-specific guidelines.
Why Do Investors Choose to Invest in IPOs?
IPOs are one way for investors to participate in equity issuance; investors typically review the offer document, company disclosures, and risk factors before applying. There are several reasons why IPOs are attractive to both new and experienced investors.
1. Early participation in issuance
Buying shares in an IPO means purchasing equity at the time of issuance; outcomes after listing depend on market prices and company performance and are not assured.
2. Listing-day price movement
Many investors apply for IPOs hoping for listing gains, which occur when the share price increases on the first day of trading. The price movement on the first day of trading can be volatile, and there is no guarantee of outcomes.
3. Portfolio Diversification
IPOs give investors access to companies in new industries or sectors, helping them diversify their investment portfolio and reduce overall risk.
4. Transparency and Regulation
Since IPOs are highly regulated, companies must disclose financial details, risks, and business plans. This transparency helps investors make informed decisions.
5. Ownership in a Growing Company
Investing in an IPO allows individuals to become part-owners of a growing business, sharing in its success and future potential.
In summary, investors participate in IPOs for reasons such as access to equity issuance and sector exposure; outcomes depend on market conditions and are not assured. However, it’s important to research each company carefully before investing, as all stock market investments carry risk.
Are There Any Disadvantages of Investing in IPOs?
While IPOs can offer good opportunities, they also have several drawbacks that investors should consider:
Market Uncertainty
IPO shares can be highly volatile. IPO shares can be volatile after listing; prices can move up or down depending on demand–supply and market conditions.
Limited Information
Newly listed companies often have a short track record, making it difficult to assess their financial stability or long-term growth potential.
Oversubscription Risk
Popular IPOs attract many investors, which can reduce your chances of share allotment, especially in the retail category.
Overvaluation and Hype
Media attention and excitement can drive prices up unrealistically, causing investors to overpay.
Lock-In Periods
Certain shareholders (e.g., promoters and some pre-IPO holders) may be subject to lock-in requirements as per applicable regulations and offer document disclosures.
Investing in an IPO can be an exciting way to participate in a company’s growth story from the very beginning. It offers opportunities for wealth creation, diversification, and ownership. However, IPOs also carry risks such as price volatility, oversubscription, and limited performance history.
Therefore, investors should always study the company’s fundamentals, read the offer document carefully, and assess their own risk tolerance before applying. An IPO application should be aligned with the investor’s objectives and risk profile; investors should rely on disclosures in the offer document.
