The IPO lock-in period isn’t just a regulatory formality—it’s a key feature of the Initial Public Offering (IPO) process that underpins market stability and protects investor confidence. For anyone navigating the complexities of the Indian primary market, understanding this lock-in mechanism is crucial. Let’s unpack what it means, who it affects, and how it shapes the market.
Table of Contents
What is IPO Lock-In Period?
The IPO lock-in period is a mandatory time frame during which certain shareholders, like promoters, early investors, and key employees, can’t sell their shares right after an Initial Public Offering (IPO). This rule helps keep the market stable and maintains investor trust by preventing any sudden dumping of shares that could make prices go haywire.
Comparison of IPO Lock-In Periods
The lock-in periods vary significantly across different categories of investors, particularly in the context of SME (Small and Medium Enterprises) and Mainboard IPOs. Below is a detailed breakdown:
| Investor Category | Mainboard IPO Lock-In Period | SME IPO Lock-In Period |
| Promoters | 18 months for up to 20% of post-issue paid-up capital, 6 months for over 20% | 1 year for half of excess holdings, 2 years for remaining half |
| Anchor Investors | 30 days (50% of shares), 90 days (remaining 50%) | 30 days (50% of shares), 90 days (remaining 50%) |
| Qualified Institutional Buyers (QIBs) | No lock-in | No lock-in |
| High Net Worth Individuals (HNIs) | No lock-in | No lock-in |
| Retail Investors | No lock-in | No lock-in |
| Pre-IPO Investors (Except Promoters) | 6 months post listing | 12 months post listing |
Also Read: SEBI’s New SME Rules
Lock-In Period For Promoters
In a meeting on 17 August 2021, SEBI relaxed lock-in timeframes for mainboard IPOs. Following the changes, the lock-in period for promoters has been reduced to 18 months for up to 20% of the post-issue paid-up capital, down from the previous requirement of 3 years. For shareholding exceeding this 20%, the lock-in period has been lowered to 6 months from what was previously 1 year. This change reflects an adjustment aimed at balancing promoter commitment with the liquidity of their investments post-IPO, potentially encouraging more companies to opt for public listings by easing the restrictions on their major shareholders.
SEBI mandated changes in lock-in requirements for SME IPOs in its meeting on 18 December 2024. According to new rules, SEBI has capped the offer for sale by SME promoters at 20% of their shareholding, and individual shareholders are limited to selling a maximum of 50% of their holdings. To ensure continued commitment, SEBI has implemented a phased lock-in for promoter holdings that exceed the minimum promoter contribution. Specifically, half of these excess holdings are unlocked after one year, and the remaining half after two years. This approach aims to maintain promoter involvement and confidence in the company’s long-term growth while still providing some liquidity over time.
Lock-In Period For Anchor Investors
Anchor investors are crucial because they give the IPO both liquidity and a vote of confidence right out of the gate. In both Mainboard and SME IPOs, they’re locked in for 30 days on half of their shares. Anchor investors can sell the remaining 50% shares after 90 days from allotment date. This step-by-step release helps manage market impact and supports stability in the stock’s early trading days.
Lock-In Period For Qualified Institutional Buyers (QIBs)
QIBs, who absorb lots of shares during an IPO, have no lock-in period for their shareholding. This means that QIBs can sell their shares as soon as the trading begins on the stock exchanges.
However, QIBs who participate as Anchor Investors in a given IPO are subjected to lock-in requirements as outlined above.
Lock-In Period For High Net Worth Individuals (HNIs)
High Net Worth Individuals (HNIs) face no lock-in period. This means they can sell their allocated shares immediately upon listing, unlike some other investor categories which might have restrictions.
Lock-in Period For Retail Investors
Retail investors get a special deal – no lock-in period for them, in either Mainboard or SME IPOs. This freedom lets them react quickly to market changes, giving them control over their investments and enhancing their risk management.
Read Also: SEBI Regulations on Stock Market Exchange
Co-Relation of Lock-in Period of IPO With Price & Volume
The lock in period for IPO plays a crucial role in stabilizing the stock price by preventing insiders from immediately selling their shares. This restriction limits the supply of shares in the market, thereby supporting price stability. However, once the lock-in period ends, there is a possibility of a price drop due to increased selling pressure.
Qualified Institutional Buyers (QIBs), promoters, and anchor investors typically hold a significant stake in the company. These holdings are often much larger compared to the shares actively traded in the market during the lock-in period. Without such restrictions, if these large holdings were to enter the market simultaneously, it could lead to impulsive price volatility.
For example, consider a tech startup that goes public with a one-year lock-in period. During this time, the stock might exhibit steady growth. However, once the lock-in ends, if many early investors decide to sell their shares, the stock could experience increased volatility or even a price decline due to the sudden surge in the supply of shares.
IPO Lock-In Period – Good Side
The lock-in period offers several benefits, including enhanced market stability and increased investor confidence. Restricting early sales helps maintain share prices post-IPO, creating an environment conducive to long-term investment. The commitment shown by promoters and key stakeholders can further bolster investor trust, making it more likely that others will invest in the offering.
IPO Lock-In Period – Flip Side
However, there are drawbacks associated with the lock-in period as well. Investors may face liquidity constraints during this time, limiting their ability to respond swiftly to market changes. Additionally, once the lock-in period expires, there may be significant selling pressure as locked-in shares flood the market, potentially leading to price declines.
Read Also: NSE Emerge Platform: Insights into Listing Norms and NSE Emerge Index
Protecting Investor Interests
The primary purpose of the IPO lock-in period is to protect investor interests by ensuring that major stakeholders cannot sell their shares immediately after an IPO. This mechanism helps maintain a balanced supply-demand dynamic in the market. When significant shareholders hold onto their investments longer, it can correlate with higher share prices and lower volatility, ultimately benefiting retail investors.
SEBI tweak these rules to enhance transparency and safeguard investor interests. Adjustments in lock-in durations reflect a deeper understanding of how markets work and how to keep them fair.
Conclusion
Navigating the IPO landscape in India requires understanding these lock-in periods. The different rules for different investors – from promoters to retail – underline the complexity of post-IPO trading. While lock-ins have their pros and cons, they’re designed to foster a stable investment environment. Knowing this helps investors make smarter choices and anticipate market behaviour after an IPO.
