IPO Basics: What is a Non-Institutional Investor (NII)?

When a company goes public through an Initial Public Offering (IPO), it offers shares to the public for the first time. Investors can participate in this by applying for shares. To streamline the process, investors are categorised based on their investment amount. One such category is the Non-Institutional Investor (NII). In this article, we will discuss the details of what is an Non-Institutional Investor. The blog will further explore their role in an IPO, features of Non-Institutional Investor, and the specific regulations governing them.

What is An Non-Institutional Investor (NII) in An IPO?

NII fully stands for “non-institutional bidder” or “Non-institutional investors”. The terms are a crucial aspect to know, especially if you’re planning to invest in IPOs. They are the individual investor who does not fall under the category of an institutional investor.

NII’s, on the other hand, are individual investors who invest their own money. Basically, any individual investors who bid for IPO allotment with over 2 Lakh of investment comes under this category. It can be high-net-worth individuals, salaried employees, or anyone else who meets the criteria set by the regulatory authorities for non-institutional investors.

There are basically two types of NII;

Small NII (sNII)

• Investors who bid for shares worth between Rs. 2 lakhs and Rs. 10 lakhs fall under this category. 
• Approximately one-third of the shares reserved for the NII category are allocated to sNIIs.

Large NII (lNII or bNII)

• Investors who bid for shares worth more than Rs. 10 lakhs are classified as Large NIIs.
• They are allocated the remaining two-thirds of the shares reserved for the NII category.

Categories of Non-Institutional Investor (NII) In an IPO

When it comes to categories based on type of investors, there are major five classification of NIIs;

1. Indian Individual Residents

These are individuals who are citizens of India and reside within the country.

2. Hindu Undivided Families (HUFs)

This includes families that are governed by Hindu law and is considered an NII.

3. Non-Resident Indians (NRIs)

Indian citizens residing outside India are classified as NRIs and can participate as NIIs in IPOs. NRIs can invest in Indian IPOs through NRE or NRO bank accounts.

4. Trusts, Societies, and Companies

These legal entities can also be classified as NIIs if they meet the eligibility criteria.

5. High Net Worth Individuals (HNIs)

While not a distinct category, HNIs are typically individuals with major financial resources who often fall under the NII umbrella.

Features of the Non-Institutional Investor (NII) Category

The NII (Non-Institutional Investor) category in IPOs has many distinctive features that set it apart from other investor categories:

• Eligibility and Participation: To participate, an investor needs to fall under the category of NIIs (Non-institutional bidders) and invest more than ₹2 lakhs in an IPO. 

• No Registration Requirement: Unlike Qualified Institutional Buyers (QIBs), Non-Institutional Investors don’t have to formally register with SEBI to apply for an IPO. Any NII can apply for a public issue as long as they possess a demat account.

• Allocation Process: In every IPO, a certain percentage of the total issue is reserved for NIIs, which is typically around 15% of the total issue size. Shares are distributed based on how much they apply for compared to the total NII demand.

• Application Mechanism: NIIs can apply for IPO shares through the ASBA (Application Supported by Blocked Amount) process, where the application money is blocked in the investor’s bank account until shares are allotted.

• Higher Risk and Reward: NIIs often invest large sums, aiming for higher profits if the IPO performs well. However, they also face higher risks as market performance can be unpredictable.

• Price Band and Bidding: NIIs usually bid at the upper price range to increase their chances of getting shares, especially in popular IPOs.

• No Lock-In Period: There is no mandatory lock-in period for shares allotted to NIIs, allowing them to sell the shares on the listing day itself if they choose to do so.

• Competitive Bidding: The NII category often experiences competitive bidding, especially in highly anticipated IPOs, which can lead to oversubscription and proportional allocation.

How one can analyze NII in an IPO for good signal to invest or not?

When looking at Non-Institutional Investors (NII) in an mIPO to decide if it’s a good investment, here’s how you can analyse:

Non-Institutional Investor Subscription

• See how much the NII portion is subscribed. If more NIIs are buying, it shows they have strong interest, which could mean the stock is worth considering.

• If there’s low subscription, it could be a warning that wealthy investors aren’t confident in the stock.

Compare with Retail and Institutional Investors: Look at how the NII participation compares to regular retail investors and big institutional buyers. If NIIs are investing more, it may signal that experienced investors are positive about the IPO.

Size of Bids: NIIs usually make larger bids than retail investors. If they’re making big bets, it shows confidence. 

Past IPO Patterns: Check how previous IPOs with high NII interest performed. If stocks did well after NIIs showed strong interest before, it could be a positive signal.

NII Impact on Price After Listing: NIIs may sell post-listing, affecting price temporarily.

Market Confidence: Strong NII participation shows market confidence in the company.

Well-Known Investors: If you see well-known investors, it can be a positive signal.

Risk Awareness: NIIs can handle higher risk, so even if they’re investing a lot, it doesn’t always mean the stock is safe. So keep your risk tolerance in mind.

NII Strategy: NIIs often look for quick profits and may not hold the stock for long. High NII interest can mean the stock might rise quickly, but not necessarily stay strong long-term.

Use Other Factors Too: Don’t just rely on NII participation. Combine this with a check of the company’s financials, and other factors before deciding.

It’s A Wrap

For an IPO, Non-Institutional Investors (NIIs) play a crucial role in the Indian stock market. With their investment capacity and flexibility, they influence demand, pricing, and market liquidity. While the NII category offers opportunities for major returns, investors must carefully consider the related risks and regulatory needs. By adhering to the rules and regulations governing NIIs, investors can enhance their chances of successful participation in IPOs. High participation by NIIs is considered as a positive sign, showing confidence from experienced and wealthy investors.

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