When a company finally goes public, it is a moment of celebration. But for seasoned investors, the listing day is the beginning of a new complex timeline, which is because of the IPO Lock-In period.
In today’s blog post, we will give you an overview of the IPO Lock-In period, along with the different types of lock-in period for the different categories of investors.
What is an IPO Lock-In Period?
The IPO Lock-In period is a fixed window of time during which a certain category of shareholders cannot sell their shares after a company lists on the stock exchange. This Lock-In period generally applies to the big investors, such as anchor investors, employees holding ESOPs, promoters, etc. This lock-in period is applicable to protect the interests of retail shareholders.
Importance of IPO Lock-In Period
- Price Stability: If a large number of shares are sold in the market at once, supply would exceed demand, which can cause a sharp correction in stock price.
- Building Confidence: IPO Lock-In period signals to the public that the insiders believe in the long-term future of the company and are not just looking for a quick exit.
- Reducing Manipulation: Lock-In period prevents large shareholders from pumping the stock price during the IPO hype and dumping it immediately after the listing of the stock.
- Transparency: IPO Lock-In period stated by the SEBI provide clarity to the retail investors that the company operates in a transparent manner and has long-term commitment towards its growth.
How does the IPO Lock-In Period work
The IPO lock-in period works in the following manner:
- Prospectus: The company, at the time of issue of the prospectus, defines the lock-in period based on the guidelines set down by the Securities and Exchange Board of India.
- Restrictions: Once the IPO opens certain categories of investors are restricted to sell the shares and during such lock-in period they cannot sell their shares in the market.
- Allotment: The IPO lock-in period starts from the date when the shares are allotted to the respective shareholder or category of investor.
- Listing of Shares: After the allotment of shares the next step would be listing of shares on the exchange. Once the listing of shares is completed the only those investors can sell shares in the open market on whom the lock-in period does not apply.
- Expiry of Lock-In Period: Once the lock-in period ends, the restrictions are lifted. These investors can then sell their shares in the open market, which often leads to an increase in volatility.
Types of IPO Lock-In Period
The different types of IPO lock-in periods are as follows:
1. Promoter Lock-In Period
Promoters are the founders or entities that control the company. Since they have the most inside knowledge, their lock-in is usually the strictest. Under current SEBI regulations, promoters’ shares are generally locked in for 18 months from the date of allotment.
2. Anchor Investor
Anchor investors are the institutional investors who commit to buy shares before the IPO opens for the general public. They get the benefit of guaranteed allotment; however, in exchange, they face a specific lock-in period. The first 50% of their shares are locked for 30 days, and the remaining 50% can only be sold after 90 days.
3. Pre-IPO and Unlisted Shareholders
Unlisted shareholders who buy shares of a company before it goes public are subject to a 1-year lock-in period from the date the company finally lists on the exchange. During this period, your shares are frozen in your demat account.
4. Significant Shareholders
For companies without an identifiable promoter, SEBI has specific rules for shareholders owning more than 20% of the company. On the day of listing, these investors can only sell up to 50% on their holdings. The remaining 50% is subject to a 6-month lock-in period.
5. Non-Promoter Pre-Issue
The non-promoter shares held by any non-promoter are subject to a 6-month lock-in post-IPO.
| Investor Category | Typical Lock-In Period | Objective |
|---|---|---|
| Promoters | 18 Months | Long-term commitment. |
| Anchor Investors | 30 Days (50%) & 90 Days (50%) | Initial Price Stability |
| Pre-IPO Shareholders | 1 Year | Prevention of quick exits |
| Significant Shareholders (>20%) | 6 Months (on the remaining 50%) | Balanced market supply |
| Non-Promoter Pre-Issue | 6 Months | Regulatory Compliance |
Lock-In Period for Retail Investors in an IPO
For a retail investor, there is no lock-in period, and they can sell their shares allotted during the IPO process anytime after the listing of the IPO. They can either sell their shares immediately after the listing, or they can hold them for the long-term. There is no compulsion to hold the shares for any particular period in the case of retail investors, thus enabling them to sell off the shares freely after listing. Same rule applied for SME IPOs.
What happens when the IPO Lock-In Period Ends
The end of IPO Lock-In period can impact the stock prices in the following manner:
- Increase in Supply: Once the IPO Lock-In period ends the supply of shares increases sharply as a large number of shares become available for trade. An instant supply can put downward pressure on the stock price.
- Volatility: The share prices might see some volatility as large shareholders selling their shares. This generally happens near the end of the lock-in period.
- High Liquidity: The liquidity of the stock generally improves as it results in improving trading experience for the traders.
- Block Deal: After the closure of the lock-in period large investors generally sell their shares through block-deal instead of selling them through open market with an objective to minimize price disruption.
Advantages of IPO Lock-In Period
The key advantages of the IPO Lock-In period are as follows:
- Protect Small Investors: The IPO Lock-In period protects the small investors as it stops the dumping of stocks by the large institutional investors.
- Showcase Performance: It gives a new company which is listed on the stock exchange an opportunity to prove its financial health through quarterly results before any major exits happen.
- Reduce Volatility: The IPO Lock-In period keeps the stock price stable during the first few weeks of trading, hence it allows retail investors to book their profit accordingly.
- Price Discovery: IPO Lock-In period allows the market participants a fair time to evaluate the performance of the company and calculate the fair price.
Read Also: What is Pre-IPO Investing?
Limitations of IPO Lock-In Period
The key limitations of the IPO Lock-In period are as follows:
- Liquidity: The IPO Lock-In period does not allow a few categories of investors to sell their shares during such Lock-In period; hence, they cannot access their capital if required.
- Late Profit Booking: Investors who invest early in the company and take high risk have to wait for a few months to book their profits.
- Significant Price Crash: Once the Lock-In period is over, it can create a mess, and a sudden drop in share prices can incur significant losses for the large shareholders.
- Short-term Protection: The IPO Lock-In period only allows short-term protection to the retail shareholders. After the end of the lock-in period the sudden volatility in the stock can impact retail investors.
Conclusion
On a concluding note, if you are a retail investor, then you do not need to worry about the IPO Lock-In period; you are free to sell your shares whenever you want after listing. However, the lock-in period of other shareholders affects your investment. Before investing in an IPO or buying a recently listed stock, you need to check the calendar whether the lock-in period of any large investor is about to end, and it is advisable to consult your investment advisor before making any investment in an IPO.
Frequently Asked Questions (FAQs)
What is the IPO Lock-in 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-in 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.
How do I know when I can sell my IPO shares?
You can sell your IPO shares once it is credited to your demat account and immediately after the listing of the IPO on the exchange.
Is there any lock-in 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.
Do all the IPOs have a lock-in 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.
Does the stock price always fall after the lock-in period is over?
No, the share prices don’t always need to fall after the end of the lock-up period.
