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What Is The Lock-In Period In An IPO?

•6 min read•by Angel One
A lock-in period in an IPO restricts certain investors from selling their shares for a set time, ensuring market stability and investor confidence after listing. Understand why it exists and its impact.
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If you’ve been reading about IPOs, you may have come across the term lock-in period. When a company launches its Initial Public Offering (IPO), it allows the public to buy its shares for the first time. But not everyone can sell those shares freely right away. 

Some investors, especially insiders like promoters, company executives, and big early investors, have to wait for a certain period before they can sell their shares. This waiting time is called the lock-in period. Let’s break this down so you can fully understand what it means, why it matters, and how it affects share prices and investor confidence. 

Key Takeaways 

  • IPO lock-in periods are a way to limit some investors, such as promoters, pre-IPO investors, employees, and anchor investors, from selling shares for a certain period. 

  • Market Lock-ins prevent sudden stock dumping and stabilize the market. 

  • Lock-in expiries are a common cause of price volatility because they result in increased supply. 

  • Tracking lock-in timelines helps retail investors assess insider confidence and plan better entry or exit points 

Why Do IPOs Have a Lock-In Period? 

The lock-in period acts as a cooling-off mechanism. Imagine if all the pre-IPO investors and promoters decided to sell their shares the day the company got listed. It would send a negative signal to the public, implying they don’t believe in the company’s future. This massive sell-off would crash the stock price, hurting retail investors. 

By forcing insiders to hold their shares, the lock-in period ensures they stay "with the ship," building trust among new investors and stabilizing the stock price during its early days on the exchange. 

Who Is Subject to the Lock-In Period? 

Not everyone who buys shares during an IPO is affected by the lock-in period. It typically applies to: 

  1. Promoters 

These are the people who started or own a big stake in the company. SEBI (Securities and Exchange Board of India) mandates that promoters must hold a certain percentage of shares for a minimum period even after the company is listed. 

  1. Pre-IPO Investors

These are investors who bought shares in the company before it went public, such as venture capitalists, private equity firms, or strategic partners. 

  1. Anchor Investors 

These are institutional investors who commit to investing a large sum in an IPO before it opens for public subscription. Their investment is locked in for a short period, usually 30 days for 50% and 90 days for the remaining 50% from the date of allotment. 

  1. Employee Shareholders

Employees who hold stock options or shares in the company may also be subject to a lock-in period, especially if they received shares before the IPO. 

Retail investors who apply during the IPO are usually not subject to any lock-in restrictions. They are free to sell their shares once the stock is listed on the stock exchange. 

How Long Is the Lock-In Period?

Retail investors who apply during the IPO are not subject to lock-in restrictions. The duration of the lock-in period can vary based on the investor category and SEBI regulations for other investor types. Here are the most common time frames: 

For Promoters: 

  • Minimum Contribution (20%): Locked in for 18 months from the date of allotment. 

  • Excess Holding (Above 20%): Locked in for 6 months from the date of allotment. 

For Pre-IPO Investors: Generally 6 months from the date of listing. 

For Anchor Investors: 

  • 50% of shares: Locked for 30 days (approx. 1 month). 

  • Remaining 50%: Locked for 90 days (approx. 3 months). 

These lock-in periods are clearly mentioned in the company’s IPO prospectus, so investors can check the specifics before investing. 

What Happens After the Lock-In Period Ends? 

Once the lock-in period expires, investors who were restricted are allowed to sell their shares in the open market. This can lead to a few possible outcomes: 

  1. Increased Supply of Shares 

Many insiders may choose to book profits, especially if the stock has gone up after listing. This increases the number of shares available for trading and may cause the price to fall temporarily. 

  1. Market Volatility  

The stock might experience more ups and downs around the end of the lock-in period as large investors decide what to do with their holdings. 

  1. Investor Signals  

If insiders continue to hold on to their shares, it’s usually seen as a positive sign, it shows they believe in the company’s long-term prospects. But if many start selling at once, it may worry retail investors and create selling pressure. 

Why Should Retail Investors Care?  

Even though retail investors are not directly affected by lock-in rules, the end of a lock-in period can influence the stock price significantly. Here’s why it matters to you: 

  • Price Fluctuations: If you’re holding IPO shares, keep an eye on when the lock-in ends. It might be a good time to re-evaluate your investment. 

  • Entry Timing: If you missed the IPO and are looking to buy the stock later, consider waiting until after the lock-in period ends. Prices might be more stable or even drop due to increased supply. 

  • Confidence Check: The actions of insiders after the lock-in period can give clues about the company's future. If they keep their shares, it’s a sign of confidence. 

Example 

Let’s say ABC Technologies Limited is listed on January 1. 

  • Anchor Investors: They can sell half their shares around January 30 and the remaining half around April 1. 

  • Promoters: If the promoters hold 60% of the company: 

  • They can sell 40% of their holding (the "excess" portion) after July 1 (6 months later). 

  • They must hold the remaining 20% (minimum contribution) until July 1 of the following year (18 months later). 

If promoters hold their shares even after the lock-in ends, it acts as a major confidence booster for the market. 

SEBI’s Role in Lock-In Periods  

SEBI, India’s market regulator, lays out the rules for IPO lock-in periods. Over time, SEBI has updated these rules to strike a balance between market stability and investor protection. 

For example, SEBI reduced the promoter lock-in period from 3 years to 18 months in some cases. This change was made to attract more companies to list without compromising investor safety. 

SEBI also monitors if companies are sticking to the lock-in requirements. If a company or investor violates these norms, penalties can apply, and trading of the shares may even be restricted.  

Tips for New Investors  

Here are a few simple tips if you’re planning to invest in IPOs: 

  • Read the Red Herring Prospectus: It contains important details about lock-in periods for different stakeholders. 

  • Track Key Dates: Note when the lock-in period ends, it can impact the stock price. 

  • Stay Informed: Watch what the insiders are doing once they’re allowed to sell. Their decisions can signal the company’s health. 

  • Don’t Panic Sell: Just because lock-in is ending doesn’t mean the stock will crash. Do your own analysis or speak with a financial adviser. 

How To Handle the End of A Lock-In Period?  

Many factors need to be considered when the lock-in period comes to an end because it is not always advantageous to immediately sell. For investors, the lack of information about the market and long-term goals should be questioned before taking action during or after the lock-in period. 

The main factors to consider are given below: 

  • Prioritise long-term financial objectives before making the exit just because restrictions are lifted. 

  • Use price dips as opportunities to acquire more shares if the performance of the company is still strong. 

  • Repurchase shares once the prices stabilise at a good rotation level. 

  • Study market sentiment- investors may benefit by using of strategic options or staggered selling during recovery phases. 

Conclusion  

The lock-in period in an IPO is a critical mechanism that brings discipline to the market. It protects retail investors by preventing a rush of insider selling and helps build trust in newly listed companies. While it may not directly affect everyone, its impact on share price and market sentiment is significant. 

Whether you're a beginner or a seasoned investor, understanding the lock-in period gives you an edge. It lets you plan better, avoid knee-jerk reactions, and make more confident investment decisions. 

So next time you explore a new IPO, take a moment to check the lock-in period details, it’s one of those small things that can make a big difference in your investing journey. 

Also Read, What Is IPO (Initial Public Offering)? 

FAQs

The lock-in period typically applies to promoters, pre-IPO investors, anchor investors, and employees with shares. Retail investors who buy during the IPO are usually not subject to any lock-in.
Promoters are usually locked in for 18 months, pre-IPO investors for 6 months, and anchor investors for 30 days. The duration can vary based on SEBI guidelines and offer structure.
The lock-in period helps prevent insiders from selling shares immediately and destabilising the stock price. It also boosts public confidence in the company’s long-term growth.
No, SEBI regulations prohibit any sale of locked-in shares before the period expires. Violating this rule can lead to penalties and trading restrictions.
When the lock-in ends, insiders can sell their shares, which may increase supply and cause price fluctuations. The market often reacts based on insider actions at that point.
By tracking lock-in expiry dates, retail investors can anticipate possible price movements. It also helps in assessing insider confidence based on whether they hold or sell.
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