What is IPO Lock-In? Understand The IPO-LOCK In Period

An IPO lock-in period is a timeframe where certain shareholders can’t sell their shares right after the IPO, which helps keep the market steady. For example, promoters usually have to wait a year before they can sell. This lock-in applies to promoters, pre-IPO investors, and employees, all of which helps maintain stability after the company goes public.

What do you understand by the Lock-in period in an IPO?

Companies issuing IPOs require certain investors to maintain their shares throughout a lock-in period that lasts between six months to one year. The duration of investor lock-in commonly extends to six months although certain rules and guidelines may permit a yearlong restriction. The main purpose of the lock-in period is to balance the stock prices and minimize the danger of significant sell-offs immediately after the IPO listing. The lock-in mechanism protects important investors such as promoters and anchor investors so they maintain their stake in the company and contribute to its long-term development.

The standard duration for an IPO lock-in is six months but the period may be extended to one year based on specific criteria. The specified timeframe prohibits investors from trading their stock ownership. The purpose of this share lock-in system is to maintain a stable share price during the period ahead of investor withdrawal. By inhibiting short-term investment strategies the company can prioritize sustainable development instead of immediate profit maximization.

What are the types of lock-in periods

Multiple types of lock-in periods are guided by the SEBI in India such as:

1. For investors: Anchor investors are allotted a 90-day lock-in period on 50% of overall shares. The remaining 50% is kept in lock for 30 days once the allotment is done.
2. For promoters: The designated lock-in period for promoters has been reduced to 18 months for the allocation of a limit of 20% of the post-issue paid-up capital based on the last three years. In the second category, the lock-in period is further decreased to 6 months for allocations that exceed 20% of the post-issue paid-up capital from the preceding year.
3. For non-promoters: For non-promoters, the lock-in period has been reduced to 6 months from 1 year.

Example of a lock-in period

The three-year limit on promoter shares begins after an IPO and serves to preserve market stability along with investor trust by preventing the main stakeholders from selling their shareholdings right away. The lock-up period for venture capitalists as pre-IPO investors extends to only six months. The diverse risk profiles and investment durations determine why investors receive different lock-up terms.

A lock-in period imposed on shares owned by promoters and pre-IPO investors prevents them from selling or transferring or pledging their stock holdings thus protecting stock performance from detrimental events caused by sudden sell-offs. The Securities and Exchange Board of India (SEBI) needs to approve exceptions to stock-lock provisions like legal requirements, employee stock options and promoter-to-promoter transfers to ensure market integrity.

Both promoter shareholders and pre-IPO investors must refer to IPO prospectus details on restrictive share provisions together with temporal limits and related conditions about share release before lock-in expires.

How does a lock-in period work?

A company establishes its initial public market presence by conducting an Initial Public Offering (IPO) which distributes shares to investors for the first time. During the mandatory lock-up time which spans six months to one year following the IPO shareholders who obtained their shares initially cannot dispose of their shares. The lock-up period creates stable market conditions that allow the company to establish its presence before additional investors enter the marketplace. The lock-up prevents early investors from either earning quick profits or taking losses as the stock price shifts during this timeframe. When the lock-up period ends investors can trade stocks with ease and the market value depends on economic factors along with investor sentiment.

Why it is necessary to have a lock-in period in an IPO?

An IPO lock-in period is essential for three key reasons:

1. Long-term investment: The lock-in period helps and motivates investors to stay committed for long term by turning them off from selling their shares right immediately.
2. Capital stability: Allowing a lock-in period enables the companies to secure stability and consistency, which paves the way to a more balanced share price.
3. Committed investors: A lock-in period helps retain a dedicated group of investors who prioritize stable growth and consistent profits over short term, unstable returns.

Limitations of a lock-in period

The lock-in period for an IPO has multiple drawbacks such as:

False demand for shares: During the lock-in period, Investors are not able to trade their shares which results in a misleading image of stock availability in the share market.

Reduction in stock value: Once lock-in periods expire investors might notice share prices falling which leads the stockholders to frequently opt to sell their shares for profit which produces an oversupply that weakens their market values.

Not enough access to funds: Investors experience restrictions on money withdrawals during lock-in periods because of which they might struggle to handle financial requirements.

How to manage the end of a lock-in period?

The four key factors to consider are:

• Investors should focus on long-term goals instead of just the end of the IPO lock-in period as holding onto shares is beneficial for companies demonstrating consistent growth.
• Buy shares when share prices are low because rising company profits will help you repurchase shares at improved rates later.
• After the share price reaches a support level traders should sell their shares and buy them back when the price stabilizes.
• Traders should evaluate market sentiment because inexpensive call options become attractive when a price rebound is predicted since lower premiums are favourable in down markets.

Disadvantages of the IPO lock-in period  

Key investors are unable to sell their shares during the lock-in period despite having any desire to do so. The lock-in period creates a false impression of strong stock demand. Retail investors question if major holders truly support the company’s future success or if they plan to sell their shares once the lock-in period expires.

There is a risk that the stock price will fall dramatically once the lock-in period finishes. When major investors sell large amounts of shares simultaneously to secure profits the market experiences an excess supply of shares which leads to a price decline. Potential investors may develop negative perceptions when they notice a surge in share availability because this pattern suggests that original investors lack confidence in the company’s future performance.

Conclusion

A lock-in period for an IPO prevents company insiders from immediately trading their shares following new stock releases. By having a lock-in period shareholders prevent excessive market share supply which supports price stability. The implementation of lock-in provisions encourages investors to hold their positions and generates positive sentiment toward markets making IPOs more successful. Analyzing benefits together with disadvantages combined with lock-in duration should be your first consideration before you invest.

 

• Author: Religare Broking
• Last Updated: February 21, 2025