How does stock price behave after the end of the lock-in period for IPO anchor investors?

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Anchor investors are big investors and get additional benefits therefore they have a 30-day lock-in period.

Amit Pamnani

August 22, 2021 / 08:49 AM IST

Who are the anchor investors?

Anchor investors are institutional investors, such as mutual funds or sovereign wealth funds, which buy substantial shares in the company just before its IPO opens for a subscription. Anchor book means the list of the institutional investors and it plays a critical role to boost investment sentiment for the IPO because anchor investors do deep research before investing in an IPO. If we see the trend then IPO backed by a strong anchor book tends to perform well in the long run.

What is it a month lock-in period?

Anchor investors can get an allotment of up to 30 percent of the IPO size and anchor investors are given allotment at the discretion of the company or the investment bankers instead on a proportionate basis. They are big investors and get additional benefits therefore they have a 30-day lock-in period which means they can’t sell their shares before 30 days from the date of allotment, which is typically two to three days before the listing.

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How does stock price behave after the end of the lock-in period?

If we analyze the data then there is no clear trend about the performance of stocks in the long term after the end of the lock-in period but we generally see selling pressure near the end of the 30-day lock-in period or on the first day of trade after the 30-day lock-in period is over. Consider the case of SBI Cards and Payment Services which fell 15 percent on day after the 30-day lock-in for anchor investors. With this fall to Rs 505, SBI Cards shares declined by 30 percent from its issue price of Rs. 755 per share. One interesting observation is seen that the low made on the first day of trade after the 30-day lock-in period may act as strong support for a further rally for quality stocks. If fundamentals are strong it’s a good time to buy on such dips.

It cannot be said that all anchor investors are long-term investors but most anchor investors stay for a much longer horizon. Although an anchor investor has a longer horizon, a lot also depends on other factors like market conditions and valuation. If market conditions are positive, not just anchors but other investors also hold stock for the longer term. The growth outlook, financial performance, and valuations are other important factors, which investors keep an eye on. Also, if a stock price exceeds return expectations, anchor investors can exit their investments immediately after the 30-day lock-in period.

Looking at the recent IPOs where the 30-day lock-in period is going to end then Zomato raised Rs 4,197 crore from 186 anchor investors, Tatva Chintan Pharma and the Rolex Rings may outperform in the long run on the back of a strong growth outlook and their financial performance while Devyani International, Exxaro Tiles, Krsnaa Diagnostics and Windlass Biotech may underperform due to concerns about valuations and poor financials.

Disclaimer: The views and investment tips expressed by investment expert on Moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.

Amit Pamnani is the Chief Investment Officer (DGM) at Swastika Investmart Ltd. He is an angel Investor & mentor to Start-ups and speaker on entrepreneurship & funding.