IPO Lock-in Period Explained: What Investors Should Know

What does IPO lock up mean, and why do they have a lock in period for large institutional investors? In an initial public offer or IPO, some portion of the shares belonging to the promoters or to the early institutional investors tend to be locked in. The IPO share price normally gets a boost when large investors are under lock-in as it prevents large scale supply of shares in the market.

Investors in IPOs would be quite familiar with the term called IPO lock in period which is used to denote a period when certain investors in the IPO cannot sell. We will look at this aspect in detail when we look at the different forms of the IPO lock in period. Through this section, let us understand what is IPO in the share market, what does IPO lock up mean, why some portion of IPO shares are locked and what are the merits and demerits of such a move.

What Does IPO Lock Up Mean? 

• IPO lock in period is a fixed time after an Initial Public Offering (IPO) during which certain investors cannot sell their shares. 
• It is a regulatory rule that prevents early investors from immediately selling shares to stabilize the stock price. 
• This period helps maintain market confidence by avoiding sudden share dumping. 
• The lock-in applies usually to company promoters and early investors who get shares before the IPO.

Table of Contents

1. What Does IPO Lock Up Mean? 
2. Why Does the IPO Lock in Period Exist?
3. Duration of Lock-in Period for Different Investors
4. What is lock in period in stock market?
5. Regulation Phase 1: How IPO lock in was applied prior to April 2022
6. Regulation Phase 2: How IPO lock in is applied after April 2022

Why Does the IPO Lock in Period Exist?

• The IPO lock in period exists to stop big investors from selling shares quickly after the IPO launch.
• It prevents sharp price drops caused by sudden selling pressure, ensuring a stable market.
• It builds trust among new investors by showing insiders have a long-term interest in the company.
• Helps in maintaining fair price discovery and orderly trading post-IPO.
• IPO share selling restrictions during lock-in are key to preventing market manipulation

Also Read: Risks of Investing in an IPO

Duration of Lock-in Period for Different Investors

• The lock-in period for IPO shares varies by investor type under IPO lock-in rules in India.
• Promoters usually have a lock-in of 3 years from the listing date.
• Anchor investors and other pre-IPO investors often have a lock-in period of 1 year.
• Employees or other specified investors may have shorter lock-ins, depending on regulations.

What is lock in period in stock market?

To understand what is lock in period in stock market, then it actually represents the process by which a private unlisted company goes public. Remember, private limited companies cannot go public. They first need to convert themselves into a public limited company before going for an IPO. The IPO is essential to get the stock listed on the stock exchanges and permit popular trading in the stock markets or the secondary markets as we know it. It can either be in the form of a fresh issue or an offer for sale or the OFS as it is popularly known.

The fresh issue, actually raises fresh capital with funds infusion coming into the company. Fresh issue results in fresh issue of shares and hence it is EPS dilutive. That means, the profits get distributed across more investors so the per capita EPS for shareholders goes down.

In an offer for sale (OFS), the promoters or the early investors (like PE investors, FPIs, Venture Capital firms or even family offices / HNIs) offer their shares as part of the IPO. In an OFS, there is only change of ownership and an expansion of the public float to enable listing of the stock. OFS does not result in fresh infusion of funds into the company and as a result of that, the OFS is not EPS dilutive, since the overall outstanding number of shares do not change.

Regulation Phase 1: How IPO lock in was applied prior to April 2022

Here were some of the salient features of the IPO lock in period rules prior to April 2022 and that had been the norm for a very long time. April 2022 represents the month when the new IPO lock-in rules of SEBI became effective. Here are the key highlights of pre-April 2022 regulation on IPOs.

• When a company goes public, the identified promoter group has to maintain a minimum contribution of not less than 20% of post-issue capital. Such contribution from the promoters is subject to lock-in for a period of 3 years. The lock-in period for the IPO begins from the date of allotment of the IPO and the calculation of 3 years commences from the date of allotment.
• However, there was one relaxation offered to the promoters lock-in prior to April 2022. For instance, if promoter contribution in the IPO was more than the minimum threshold of 20% requirement, in that case the excess portion would be locked-in for a period of just 1 year from the date of allotment and not for 3 years. So this 3 year lock-in applied only in the case of the 20% holding.
• Apart from the promoters, the concept of lock-in will also extend to other early investors like institutions, HNIs and family offices and in such cases, the lock-in period would be 1 year from the date of allotment. This will also include any pre-issue capital held by the non-promoter early investors ahead of the IPO and includes any strategic pre-IPO allotment of shares done by the company.
• For anchor investors, in the pre-April 2022 scenario, the lock-in period applicable was 30 days from the date of allotment of the shares. The full 100% anchor allocation of shares was subjected to a mandatory uniform lock-in period of 30 days till April 2022.

Regulation Phase 2: How IPO lock in is applied after April 2022

As per a SEBI circular on modified lock-in period for promoters, anchors and other early investors, there were several changes proposed by the regulator. An important change was that in the light of the rise in digital IPOs, SEBI decided to replace promoters with the “Controlling Shareholders” category.

Another major change was to relax the lock-in requirements for promoters to ensure better liquidity. In short, the regulator has looked to rationalize the IPO lock-in rules to a large extent. Here are the highlights.

• Effective April 2022, the lock-in period for promoters (controlling shareholders) holding up to 20% of IPO was halved from 36 months to 18 months. For residual holdings of promoters beyond 20% and for non-promoter holdings, lock-in period has again been halved from 12 months to 6 months.
• While promoters got some concessions, the anchor investors norms were tightened. The lock-in norms for anchor investors have been made more stringent to reduce post-IPO volatility. The extant anchor investor lock-in period of 30 days will apply to 50% of the portion allocated to anchor investors. For the remaining 50% portion, the lock-in period will be increased to 90 days from the allotment date.