The prolonged bull run in the stock market has put mutual funds in a bind. Money is flowing in streams to their schemes, but putting that money into equity is a risky gamble, given the far stretched valuations and the edgy geopolitical situations that can wash away months of gains in no time.
As options narrowed, many funds preferred to sit on cash rather than wager that in an ill-poised market. Luckily for them, the funds have now found a new avenue to deploy their cash into equities: through initial public offerings, or IPOs. Mutual funds have been bidding aggressively as anchor investors in the recent IPOs.
So high is the demand for shares from domestic institutions, and foreign institutional investors, in the anchor investors’ book bidding that merchant bankers and companies are finding it hard to make out whom all to allocate and who all to be left out. Anchor investors are allotted shares a day before the IPO opens for the general public.
ICICI Lombard General Insurance’s anchor allocation, made on Thursday before the IPO opened on Friday, September 15, more than reveals the jostling by mutual funds to get a share of the anchor investor pie.
The IPO committee of ICICI Lombard General Insurance and the selling shareholders—in consultation with the merchant bankers—allotted 2.45 crore equity shares worth Rs 1,625 crore to 64 anchor investors at Rs 661 a share, at the upper price band. Of this, 17 mutual funds were allocated 35.1 per cent, or more than a third, of the total shares. Most of these 17 funds made bids for multiple equity fund categories.
Among them, DSP Black Rock Mutual Fund and Sundaram Mutual Fund got allocations in six fund categories. While L&T Mutual Fund got allocations under five categories, Birla Sun Life MF and SBI Mutual Fund got shares under four categories.
Since the anchor allocation is a discretionary exercise, and not made on a proportionate basis as in the IPO, the bidders have to be lucky to get shares under this, especially in smaller IPOs.
The element of discretion makes the task complex for the company making the IPO and the merchant bankers handling the issue. Says Sumit Sharma, chief financial officer of Pratap Snacks, an Indore-based food company whose Rs 482-crore IPO opens on September 22: “The three merchant bankers are finding it difficult to decide whom to leave out (in the anchor investor allocation), as mutual funds, insurance companies and the foreign portfolio investors all are competing to get shares.”
In the recent Matrimony.com IPO, anchor investor shares in the mutual fund category were allocated only to HDFC Trustee Company on behalf of HDFC Mutual Fund, which received allocation for three different funds—HDFC Prudence Fund, HDFC Growth Fund and HDFC Capital Builder Fund.
But now with ICICI Lombard General Insurance allocating shares to 17 mutual funds, the scramble for shares will get only worse for future IPOs. For instance, SBI Life Insurance is coming out with an IPO on September 20, which will raise Rs 8,400 crore at the upper price band of Rs 700 a share. This IPO has a provision to allocate up to 60 per cent of the qualified institutional buyer (QIB) portion to anchor investors “on a discretionary basis, out of which one-third shall be reserved for domestic mutual funds.”
Mutual funds reckon a Rs 500 crore to Rs 1,000 crore investment opportunity in SBI Life Insurance, as 50 per cent of the net offer will be allocated on a proportionate basis to QIBs, going by the red herring prospectus filed with the markets regulator.
This apart, 5 per cent more of the QIB portion, excluding the anchor investor part, will be available for allocation on a proportionate basis solely to mutual funds, with the remainder of the QIB portion available for allocation on a proportionate basis to all QIB bidders, including mutual funds, but excluding anchor investors.
So mutual funds now have two windows, anchor investor and QIB, to bid for and can look forward to get ting a decent slice of future IPOs.
The current high inflows are not the only reason for mutual funds’ new-found love for the anchor investor window. As anchor investors mutual funds do not have to set aside higher amounts in anticipation of allotment, as these are reserved shares. This helps them manage their liquidity better.
Though anchor investor allotments are made on a discretionary basis, the chances of allotment in the anchor book are much higher compared to allotment in main book in IPOs, In IPOs, the allotment may be a miniscule of what they have bid for because of high oversubscription.
Big players have a good chance of getting anchor investor allotments. In most cases, merchant bankers and management of the company making the IPO look at the quality and fund size before allocating shares in the anchor book.
"Company and merchant bankers prefer long-term funds as compared to short-term funds so that it has a positive effect on the IPO," said a merchant banker working with ICICI Securities.
Anchor investors have to stay invested for at least 30 days post-listing and face the risk of price depreciation in an uncertain market at the time of fixing the IPO price and after listing on the stock exchanges.
The recent bull run has also made it tough for fund managers to invest in quality mid-cap and small-cap stocks as their valuations looked stretched. This has forced them to look out for fresh equity offerings.