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You’ve probably seen the term “IPO” in a newspaper or maybe heard about it on a business news channel and wondered what it meant. Initial Public Offerings (IPOs) allow businesses to offer shares to the general public for the first time. Initial public offerings are a terrific option for investors looking to make profits.
Some investors may be granted access to pre-IPO investments when companies and their underwriters set the date for the initial public offering (IPO). There is a time limit on these kinds of investments during which buyers can’t sell their units. This is what we call a lock-in period.
That said, let’s explore the lock-in period, its types, and how it works in an IPO.
What is the lock-in period?
An IPO lock-in period prevents insiders and early investors from selling their shares for some time after the business’s initial public offering. For publicly listed corporations, it initially reduces the selling pressure.
Existing shareholders are restricted from selling their shares for a certain period after the IPO, usually between 90 and 180 days. The months after a company’s listing are essential for stabilising the stock market, promoting share prices, and reducing volatility.
In a nutshell,
- The term “lock in” or “lock up” describes when investments cannot be withdrawn or sold.
- Lock-in periods are often used for start-ups, hedge funds, private equity IPOs, and specific mutual funds.
- You can’t immediately take the money out when the lock-in period expires. Instead, they need to take a moment to assess the investment’s status and determine if it needs to be redeemed or reinvested.
- The term of an investment is not defined by a lock-in period.
- It provides room for growth for new investors and limitations on investment.
Types of IPO lock-in periods
Several lock-in periods in the Indian share market are listed below, following SEBI guidelines:
- A 90-day lock-in period applies to 50% of the shares given to anchor investors as of the allocation date, while a 30-day lock-in period is in place with the other 50% of the shares.
- Promoters no longer have to wait three years to meet the lock-in criteria for allocating up to 20% of the post-issued paid-up capital—it is now just 18 months. The one-year lock-in rule for allotments over 20% of the post-issued paid-up capital has been shortened to six months.
- Moreover, the one-year lock-in term for non-promoters has been shortened to six months.
- When an investor class’s lock-in period expires, they can liquidate their business shares.
How does the lock-in period for IPOs work for different investors?
The lock-in period has been set into effect to allow the business to settle down and stabilise itself until shareholders can get their money out. This consistency is essential to attract long-term investors interested in the company’s long-term prospects instead of just making a quick profit.
Early investors and employees may find this phase to be rather difficult. On the other hand, if the business goes public and the value of its shares grows, the wait may be completely justified. When stock is openly traded, employees and early investors may sell their shares for a profit.
IPO lock-in period for institutional investors
Each lock-in period has a different duration. The duration is typically one year for institutional investors like banks and hedge funds. The typical duration of an IPO when individual investors use it to buy shares is six months.
Anchor investor lock-in period
Typically, an anchor investor has a longer duration than other investors. As a result, the lock-in duration differs for each participant in the IPO. Anchor investors can sell 50% of the shares after 30 days and the other half after 90 days from the date they acquired the shares.
IPO lock-in period for retail investors
Retail investors, however, are not subject to an IPO lock-in period. A six-month lock-in period often follows a company’s initial public offering (IPO) and occurs on the day of the stock exchange’s listing.
Early investors—anchor investors or venture capitalists—cannot liquidate their holdings via stock exchanges throughout this lock-in period.
Luckily, individual investors do not have to wait until the first day of the listing to sell the shares they were awarded for applying to the issue since there is no lock-in period for initial public offerings.
Conclusion
If employees sell off their shares all at once, the company can suffer short-term losses. There is less chance of a significant sell-off that might drive the share price down if insiders can’t sell their shares.
This is why a lock-in period is beneficial for both businesses and consumers. Because of this system, investors may rest easy and have faith in the organisation’s future while the business gets the time to stabilise.
FAQs
A lock-in period is when an investment cannot be sold or redeemed. The issuer of the investment or the regulator usually specifies the lock-in period. To calculate the lock-in period, you need to know the date of allotment and the end date of the lock-in period.
A lock-up period after the IPO is a contract provision that prevents insiders with shares from selling them for a certain amount of time after the IPO. A standard IPO lock-up period is typically 180 days, while lock-ups for SPAC (Special Purpose Acquisition Company) IPOs usually last 180 days to one year.
A lock-in period is compulsory for some investments, such as the Equity Linked Savings Scheme (ELSS) or retirement funds. The purpose of a lock-in period is to reduce volatility, ensure stability, and provide tax benefits for investors. However, not all investments have a lock-in period.
A 3-year lock-in period means that the investment cannot be sold for three years from the date of allotment. This applies to ELSS mutual funds, which have a lock-in period of 3 years. ELSS funds are tax-saving instruments that offer deductions under Section 80C of the Income Tax Act.
A lock-in period is a minimum duration for which an investment has to be held before it can be sold or redeemed. A tenure is the total duration for which an investment is held or can be held. A lock-in period does not define the tenure of an investment.