IPO Lock-In Period Explained: Who can sell, when, and how it impacts stock prices – IPO
Highlights
- Lock-in period is to avoid sudden oversupply of shares in market immediately after listing
- Retail investors are free to trade as soon as shares hit Dalal Street
- Once the lock-in expires, shareholders are free to sell their holdings
IPO Lock-In Period: Ever applied for an IPO, you have probably stumbled upon the term “IPO lock-in period.” It might sound technical, but do not let it intimidate you. In simple terms, it is a waiting period that keeps certain investors from selling their shares immediately after a company goes public. Think of it as a cooling-off period designed to keep the stock market stable, protect retail investors, and signal confidence in the company’s future.
Not everyone faces these restrictions. Promoters, pre-IPO investors, anchor investors, and sometimes employees have to sit tight for a set period before they can cash out.
Retail investors, on the other hand, are free to trade as soon as shares hit the stock exchange. Understanding the lock-in period is more than just a technicality—it can influence stock prices, market sentiment, and your own investment decisions. Here is a closer look at why IPOs have lock-ins, who they apply to, how long they last, and what happens when they expire.
Why do IPOs have a lock-in period?
The primary objective of a lock-in period is to avoid a sudden oversupply of shares in the market immediately after listing.
If promoters or early investors were to exit on the first day, it could send a negative signal about the company’s future prospects, potentially triggering a sharp fall in the stock price and hurting retail investors.
By mandating a holding period, regulators ensure that key stakeholders remain invested in the company, helping build investor confidence and ensuring price stability.
Who is subject to the lock-in?
Lock-in rules apply only to specific categories of shareholders:
- Promoters: Founders and major shareholders must retain a minimum stake for a defined period, as mandated by SEBI.
- Pre-IPO Investors: Venture capital, private equity funds and strategic investors who invested before the IPO typically face a lock-in.
- Anchor Investors: Institutional investors allotted shares before the IPO opens to the public usually have a 30-day lock-in.
- Employees: Employees holding pre-IPO shares or ESOPs may also be subject to restrictions.
Retail investors, however, face no lock-in. They are free to sell their shares once the stock is listed.
How long does the lock-in period last?
The duration depends on the investor category. Here is a category-wise breakdown:
- Promoters: Minimum 18 months (in some cases, part of the holding may be locked in for six months)
- Pre-IPO investors: Typically six months
- Anchor investors: 30 days from allotment
- Employees: Varies based on the IPO structure
What happens when the lock-in period ends?
Once the lock-in expires, shareholders are free to sell their holdings. This can lead to:
- Higher supply: An increase in tradable shares may put temporary pressure on prices
- Volatility: Stocks may witness short-term swings
- Market signals: Continued holding by insiders signals confidence, while heavy selling may raise concerns
Why retail investors should track lock-in expiry
Even though retail investors are not directly affected, lock-in expiries can influence stock performance:
- Prices may fluctuate around expiry dates
- Stocks may become more attractive after early volatility settles
- Insider actions offer clues about long-term confidence in the business
For example, if anchor investors sell aggressively after their lock-in ends, the stock may see short-term pressure. Promoter behaviour after their lock-in expiry is watched even more closely.
The Securities and Exchange Board of India (SEBI) regulates lock-in norms to protect investors and ensure orderly markets. In recent years, SEBI has shortened promoter lock-in periods—from three years to 18 months in certain cases—to encourage more companies to go public while maintaining safeguards.
- Read the IPO prospectus carefully
- Note key lock-in expiry dates
- Track insider shareholding changes
- Avoid panic reactions around lock-in events
Lock-in expiry does not automatically mean a stock will fall, but it is an important factor investors should factor into their analysis.
(Disclaimer: The above article is meant for informational purposes only, and should not be considered as any investment advice. ET NOW DIGITAL suggests its readers/audience to consult their financial advisors before making any money related decisions.)
