Investors see IPOs as an opportunity to get listing gains, but very few of these investors understand the concept of IPO Lock-up. There are certain category of investors who has to face the mandatory lock-up period after the IPO listing.
In today’s blog post, we will provide an overview of the IPO Lock-up period and the key lock-up rules for different investor categories.
What is an IPO Lock-Up Period?
An IPO lock-up period is a fixed time after a company’s IPO listing during which certain categories of shareholders are not allowed to sell their shares. This category of shareholders includes promoters, anchor investors, employees, etc. The key purpose of the lock-up period is to stop heavy selling just after the listing of the IPO. If the heavy selling continues, the stock prices may correct sharply. This is a temporary restriction to maintain stability in the stock prices.
Key Features of IPO Lock-Up Period
The key features of the IPO Lock-Up Period are as follows:
- Temporary Restriction: The IPO Lock-Up period applies a temporary restriction on investors from selling their shares immediately after the listing of the company’s IPO.
- Specific Investor: This Lock-Up period restriction applies only to a specific category of investors. This generally applies to promoters, anchor investors, employees, etc.
- Stable Stock Price: The key objective of the IPO Lock-Up period is to provide stability in stock prices after the listing on the stock exchange.
- Increases Confidence: The IPO Lock-Up period increases confidence among the retail investors, as promoters, etc., cannot sell their shares.
How Does an IPO Lock-Up Period Work?
The steps of an IPO Lock-Up period works is as follows:
- IPO Issue: Whenever the company issues its IPO, it mentions the lock-in rule in its offer document based on the guidelines provided by SEBI.
- Allotment and Listing: Once the IPO issue process is completed, the shares are allotted to the respective shareholders. And after the allotment, stocks get listed on the stock exchange.
- Restriction on Sale: There are certain categories of investors, such as promoters, anchor investors, etc., who are restricted from selling their shares for a specific period of time.
- Expiration of Lock-Up Period: Once the lock-up period expires, those investors become free to sell their shares in the open market. The availability of a large number of shares can create volatility in share prices.
IPO Lock-Up Rules for Different Investors
Different types of investors have different Lock-Up rules in IPO. The rules related to Lock-Up rules are as follows:
- Promoter Lock-Up Rule: According to the regulations issued by the Securities and Exchange Board of India, promoters’ shares are generally locked in for a period of 18 months from the allotment date of shares. However, in certain cases where IPO proceeds are heavily used for capital expenditure, the lock-in can extend to 3 years. Additionally, any promoter shareholding above the minimum promoter contribution of 20% is generally subject to a lock-in period of 6 months from the date of allotment, as per SEBI regulations.
- Anchor Investors Lock-Up Rule: The anchor investors have different lock-in periods. The first 50% of the shares are locked in for a period of 30 days. Whereas, the remaining 50% of the shares can be sold after a period of 90 days.
- Institutional Investor: The key institutional investor, including venture capital firms, private equity investors, etc., who purchase shares before the IPO period, faces a lock-up based on the regulations laid down by the SEBI. Under current SEBI regulations, many non-promoter pre-IPO investors typically face a 6-month lock-in period from allotment.
- Employee Lock-Up: There are various companies that issue shares to their employees in the form of Employee Stock Ownership Plans. Such shares also have restrictions on selling shares after the listing of the IPO.
Advantages of IPO Lock-Up Period
The key advantages of the IPO Lock-Up period are as follows:
- Stability in Stock Price: The Lock-Up period restricts large shareholders from selling their shares immediately after listing on the stock exchange. It reduces the chance of a sudden crash in the price of shares.
- Reduces Manipulation Risk: In case the lock-up period does not apply to insiders or large shareholders, they might sell large quantities of shares once the shares are listed on the stock exchange. This reduces the chance of any manipulation in stock prices.
- Increase Confidence of Investors: Due to the lock-in period, the retail investor feels more confident before investing in any IPO. It indicates that the large investors believe in the company’s future growth.
- Companies’ Performance: The lock-up period in an IPO provides a newly listed company to showcase its financial performance and growth potential before key shareholders start exiting.
Read Also: What is Pre-IPO Investing?
Disadvantages of IPO Lock-Up Period
The disadvantages of the IPO lock-up period are as follows:
- Limited Liquidity: The key investors in the IPO, such as promoters, venture capital, and private equity, cannot sell their shares during the lock-up period, reducing liquidity for existing shareholders.
- Delay in Profit Booking: Early investors in a company’s IPO will have to wait several months to book their profits, even if the stock performs well after listing.
- Increased Volatility: Nearing the end of the lock-up period due to speculation about potential selling activities. It can create short-term volatility in the stock market.
- Possibility of Fall in Price: One of the key concerns is that once the lock-in period is over, the large number of shareholders might sell their shares at once, hence the stock prices can decline sharply.
Conclusion
On a concluding note, the IPO lock-up period plays a key role in stabilising the company’s share price after listing. It helps newly listed companies to prevent a sudden fall in share price and support smoother price movement by focusing on long-term growth. However, the lock-up period can also impact the liquidity for investors and possible volatility in the share price after the lock-up period is over. For an investor, it is essential to understand the IPO lock-up period as it can influence the stock price significantly. Explore and invest in IPOs with Pocketful, offering zero brokerage on IPO applications and a hassle-free investing experience. However, it is advisable to consult your investment advisor before making any investment in an IPO.
Frequently Asked Questions (FAQs)
What is the IPO Lock-Up period?
An IPO Lock-up is a period or duration during which a certain category of investor cannot sell their shares in the market after the listing of the IPO.
What is the duration of the IPO Lock-up period?
The lock-up period of an IPO after listing depends on the categories of investors; it may range from a few days to months.
Is there any lock-up period for retail investors investing in an IPO?
No, there is no lock-up period for retail investors investing in an IPO. They are free to sell their share anytime after the listing.
Does the stock price always fall after the lock-up period is over?
No, the share prices don’t always need to fall after the end of the lock-up period.
Do all the IPOs have a lock-up period?
No, generally most of the IPOs have a lock-up period for certain categories of investors. Although the exact rules and lock-up duration may differ from one company to another.
