Types of Investors in IPO - Detailed Guide

There are several types of investors in IPOs (initial public offerings) categorised by investment size and institutional status. The primary categories are retail individual investors (RIIs), non-institutional investors (NIIs/HNIs), qualified institutional buyers (QIBs), and anchor investors. These segments determine the allocation percentages, with retail investors usually having reserved portions in IPOs. Let us learn more about these types below. 

Why Are There Different Types of Investors in IPOs?

Investors are categorised in an IPO to ensure a fairer, more balanced distribution of shares, maintain stability, and better manage demand. The investor types are classified by regulatory bodies to safeguard smaller investors and ensure proper institutional credibility. It also helps manage capital inflows more effectively through specific rules and quotas across all these groups. 

This classification also enables smaller, more common investors to participate alongside financial institutions, mutual funds, and banks. At the same time, there is also space for bigger institutional investors, high-net-worth individuals, and corporate entities.

Classification prevents market volatility caused by major players while safeguarding the interests of the general public. 

Types of Investors in IPO

Here are the main investor categories in IPOs for your perusal: 

• Retail Individual Investors (RIIs)

Retail individual investors (RIIs) in IPOs are resident individuals, NRIs, and HUFs (Hindu Undivided Families) who apply for shares worth up to ₹2 Lakh. In most cases, at least 35% of the net offer is kept reserved for this category. RIIs may bid at the cut-off price to improve their chances of allotment. In the event of oversubscription, share allotment is often conducted by lottery. 

• Non-Institutional Investors (NII) / High Net-worth Individuals (HNI)

Non-institutional investors (HNIs) in IPOs are companies, individuals, societies, and trusts applying for shares worth more than ₹2 Lakh. Usually, 15% of the offer is kept reserved for NIIs, although they cannot bid at the cut-off price. They have to specify their price while bidding. The category is further subdivided into small NIIs, who bid between ₹2 Lakh and ₹10 lakh, and big NIIs, who bid above ₹10 lakh. 

• Qualified Institutional Buyers (QIBs)

A QIB in an IPO is a highly regulated institutional investor, such as a commercial bank, a foreign portfolio investor (FPI), a public financial institution, or even a mutual fund. In most cases, 50% or more of the net offer is reserved for this category. QIBs often receive allotments through the book-building process, which frequently includes anchor investors. They are the ones bidding before the public offer, and this pre-IPO (before the opening) investment serves as a confidence measure, with their shares locked in for 30-90 days. 

Other IPO Investor Categories

Here are some of the other IPO bidding categories: 

• Employee Category

It is a dedicated quota within the IPO reserved exclusively for permanent and full-time employees of the issuer, its holding company or subsidiary. In such cases, the reservation is usually up to 5% of the total post-issue paid-up capital.

Employees may also receive shares at a discount (up to 10% or a fixed amount) compared to the price offered to the general public. In the event of oversubscription, allotment is made proportionately to ensure that each employee receives at least one lot. 

Employees can usually apply for shares valued up to ₹2 Lakh to get discounts. If the quota is under-subscribed, this limit may be increased up to ₹5 lakh. There is no compulsory lock-in period for these shares; they may be sold on the day of the listing.

Permanent employees on the payroll (on the cut-off date) will be eligible, with vendors, consultants, contract workers, and promoters usually excluded. 

• Shareholder Category

It is a category tailored for existing and non-promoter shareholders of the promoter or parent company. This is most often seen when a parent's subsidiary goes public. The reservation is usually capped at 10% of the issue size and may occasionally reach 15%.

With regard to eligibility, the shareholder should have at least one share of the group/parent entity on the record date/filing of the RHP (red herring prospectus). 

Investors sometimes apply in both the retail/HNI and shareholder categories to increase their chances of allotment. In case of oversubscription, allotment is made proportionately or by lottery. There is no lock-in period for these shares as well. 

• Anchor Investors

Anchor investors are a specific subset of QIBs (qualified institutional buyers) invited to subscribe for shares a day before the IPO opens to the general public. They ensure more stability and build confidence, while putting a stamp of quality on the issue.

The minimum bid is usually ₹10 crore for mainboard IPOs, while this is usually ₹1 crore for SME IPOs. Up to 60% of the total quota for QIBs may be allotted for anchor investors. In this case, a mandatory lock-in period applies: 50% of the shares will be locked for 30 days, with the remaining 50% locked for 90 days. 

These investors pay a fixed price, which is finalised within the price band. However, parent companies, promoters, and merchant bankers cannot take part as anchor investors. 

IPO Category-Wise Reservation Structure

For standard mainboard IPOs in India, the category-wise reservation structure is usually the following: 

*The structure may vary slightly for particular IPOs. You should always refer to the RHP (red herring prospectus). 

How Allotment Differs Across Investor Types

IPO allotment differs considerably across multiple investor types. Here is a summary of the same for your benefit: 

• Retail Individual Investors (RIIs)

35% of the net offer, with the lottery system used in the event of oversubscription. In this scenario, the system aims to give at least 1 lot to as many individual applicants as possible. If demand crosses the total available minimum lots, the lottery comes into play. These investors may bid at the cut-off price to improve their chances of allotment. 

• Non-Institutional Investors (NII) / High Net-worth Individuals (HNI)

The allotment is 15% of the offer and is done proportionately. There is no lottery system. Suppose the category is oversubscribed 5x; in this case, the investor will receive about 5% of the shares applied for. The segment is divided into big and small NIIs, and they cannot bid at the cut-off price. However, there is now a lottery system for small HNIs, just like in the retail category.

• Qualified Institutional Buyers (QIBs)

The reserved quota is up to 50%, but may be slightly higher for some companies (usually those which are unprofitable). The allotment method is either proportionate or discretionary. Allotment to these professional and big-ticket investors is based on their bid sizes. While under-subscribed QIB parts cannot be transferred to the RII/NII category, oversubscribed NII/RII portions may sometimes flow to this category. 

Retail vs HNI vs QIB - Key Differences

Here are some key differences among retail, HNI, and QIB investor categories for IPOs. 

While HNIs need to block a large amount of capital, they face less competition than the retail category. Note that using the same PAN for applications in both the NII/HNI and retail segments will result in all applications being rejected. 

Which IPO Category Should You Apply Under?

You should apply for an IPO under the retail (RII) category if your total bid amount is lower than ₹2 Lakh. This works if you’re an individual resident, an HUF, or an NRI. NIIs or HNIs are those applying with investment sizes above ₹2 Lakh. In this case, small HNIs are those applying between ₹2 Lakh and ₹10 lakh, and big HNIs are those applying above ₹10 lakh. 

If you are an employee of a company, you may apply under this quota (usually up to ₹5 lakh). If you are an existing shareholder, you may also apply under this quota. The QIB category is reserved for financial institutions, banks, mutual funds, and similar entities. 

Impact of Investor Categories on Listing Price

The listing price of an initial public offering (IPO) is significantly influenced by the composition of investor segments. Here’s mapping the same: 

• Anchor investors: specialised institutional investors who participate before the IPO opens to the general public and secure large commitments. Their participation serves as a stamp of approval and builds confidence, usually leading to higher valuations and, subsequently, higher listing prices. 
• QIBs: They usually opt for high-quality and higher-priced IPOs. Strong demand in this category usually leads to a more stable and higher listing price. Their participation indicates that the stock is properly valued and well-researched. 
• HNIs: They often drive higher subscription rates, and their participation may lead to intense selling soon after the listing or flipping. It may lead to higher volatility and very high listing gains in cases of extreme oversubscription. 
• RIIs: Retail demand, especially upon oversubscription, is correlated strongly with higher listing gains. Yet these investors often exhibit a stronger disposition effect (selling swiftly whenever they earn profits). It may cap long-term gains or cause price dips after the initial rise. 

Common Misconceptions About IPO Categories

There are several common misconceptions revolving around IPO categories. Some of them include: 

RIIs: 

• Misconception: Applying with more money increases the chances of being allotted.

In reality, if the IPO is oversubscribed, the lottery system will be implemented. So, if you apply for one or ten lots, it will not matter in the end. Applying for the maximum number of lots in the retail category may actually be a waste of capital. 

• Misconception: Retail investors will always get allotment.

With higher rates of oversubscription, especially for buzzy IPOs, many investors in this category may not receive any shares. The lottery system means that one out of multiple applicants will get allotment. 

• Misconception: Applying from multiple demat accounts will boost my chances.

Using multiple demat accounts with the same PAN number for the same IPO will result in your applications being rejected. Only one application is allowed per PAN. 

HNI/NIIs-

• Misconception: HNI allotment is always done proportionately.

The rules have now changed for the small HNI category. In the case of oversubscription, there is now a lottery system, just like in the retail category. 

• Misconception: You have to be immensely wealthy to be an HNI.

The NII/HNI category begins with applications going above ₹2 Lakh. This is accessible to many individuals. However, there are higher risks, since it often involves margin funding/borrowed funds. 

General IPO Myths

• Myth: Oversubscription guarantees gains upon listing.

A higher subscription rate is an indicator of high demand, not of profitability. Several hugely oversubscribed IPOs have often listed at discounts, leading to sizable losses. 

• Myth: GMP is a guaranteed indicator.

The Grey Market Premium is based on much-hyped, speculative, and at times unofficial trading. It is not an accurate predictor of the actual listing price. 

• Myth: IPOs of big brands are always safe bets.

This is not always the case; valuations are more important than the brand's name and identity. Popular yet overvalued IPOs may eventually underperform. 

• Myth: Investing in IPOs equates to being an early investor.

By the time any company goes public, the early growth has already been tapped by promoters and venture capitalists. Hence, the IPO is more often than not an exit for early investors. 

• Myth: SME IPOs are only for very risky, smaller companies.

While riskier, SME IPOs have sometimes offered sizable returns, though they require more thorough analysis than mainboard IPOs. 

Conclusion

As you can see, there are various types of investors in IPOs, including RIIs, HNIs/NIIs, QIBs, and even employees and shareholders. Each category has its own ticket sizes, rules, and impact on the IPO at large. Understanding it will help you assess your suitability for IPO investments and deepen your knowledge of the IPO process.