Introduction
In November 2025, the Securities and Exchange Board of India (SEBI) released a significant consultation paper aimed at streamlining the Initial Public Offering (IPO) process. The core of this proposal addresses a long-standing operational bottleneck: the inability to enforce mandatory “lock-in” rules on pre-IPO shares that have been pledged as collateral by investors.
Currently, pre-IPO investors (non-promoters) are subjected to a 6-month lock-in period after listing to ensure the market remains stable. However, technical limitations in the depository system meant that shares that were pledged to lenders could not be formally “locked in.” This forced investors to release these pledges, and often repay loans prematurely, before the company could list.
SEBI’s new proposal introduces a mechanism to mark these pledged shares as “non-transferable” rather than “locked-in,” thus satisfying the regulatory requirements effectively with no disruption to the investor’s financing arrangements. This move is positioned as a significant reform for “Ease of Doing Business” which benefits issuers, pre-IPO investors, and lenders alike.
2. The Current Regulatory Landscape
Historically, Indian labour laws operated on a philosophy of “protectionism.” This meant barring women from working in certain industries or shifts (specifically night shifts) under the guise of safety. The OSH Code, 2020 fundamentally changes this stance.
It mandates that women shall be entitled to be employed in all establishments for all types of work, including night shifts (typically 7 PM to 6 AM), provided they give their consent. This is a significant legal shift. It removes the statutory barrier that previously prevented women from taking up high-paying roles in manufacturing, logistics, or IT that require 24-hour operations.
While legally progressive, the practicality lies in the “conditions.” Employers must provide adequate safety measures, working hours, and crèche facilities. The challenge for employers and businesses here is the burden of compliance. For smaller firms, the cost of providing private transport and security for a few female employees might outweigh the benefit of hiring them. Consequently, while the law permits night work, economic rationale might discourage it unless the government provides shared infrastructure.
2. Wage Parity: broadening the Scope
To understand the significance of this proposal, we must first understand the current “Lock-in” regime under the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 (ICDR Regulations).
The 6-Month Rule (Regulation 17)
If pre-IPO investors dump shares immediately after a company finishes listing, it could crash the stock price and harm retail investors. To prevent this from happening, SEBI mandates a lock-in period.
- Promoters are typically locked in for 18 months or 3 years.
- Non-Promoters (Pre-IPO Investors): The entire pre-issue capital held by non-promoters is locked in for 6 months from the date of allotment in the IPO.
The Operational Bottleneck
While the rule is clear in theory, it faces a technical hurdle in practice. Many pre-IPO investors (such as High Net-worth Individuals or investment firms) pledge their shares to banks or Non-Banking Financial Companies (NBFCs) to raise capital.
The current systems used by India’s depositories (NSDL and CDSL) cannot place a “lock-in” tag on shares that are already marked as “pledged.” The system views these two statuses as technically incompatible. Consequently, when a company files for an IPO, these investors are often forced to un-pledge their shares to allow the lock-in tag to be applied. This disrupts their financial planning and can delay the IPO if investors are unable or unwilling to release the pledge immediately.
3. The SEBI Proposal (November 2025)
In its consultation paper dated November 13, 2025, SEBI proposed a pragmatic solution to bypass this technical conflict without diluting the safety of the market.
- The “Non-Transferable” Mechanism
Instead of forcing the depository system to apply a “lock-in” tag (which fails on pledged shares), SEBI proposes that these shares be recorded as “Non-Transferable”.
- For the Issuer: The company will instruct the depository to mark the specific pledged shares as non-transferable for the duration of the 6-month lock-in period.
- Effect: This achieves the same outcome as a lock-in, meaning the investor cannot sell the shares but it allows the “pledge” status to remain active.
- Treatment of Invocation and Release
SEBI has outlined specific scenarios to ensure this flexibility does not become a loophole:
- If the Pledge is Invoked: If the borrower defaults and the lender (bank/NBFC) seizes the shares during the lock-in period, the shares will move to the lender’s account but will remain locked-in. The lender becomes the owner but cannot sell the shares until the 6-month period expires.
- If the Pledge is Released: If the investor repays the loan and the pledge is removed, the shares will revert to the investor but will automatically be locked in for the remainder of the 6-month tenure.
- Mandatory Changes to Articles of Association (AoA)
To give this proposal legal backing, SEBI suggests that IPO-bound companies must amend their Articles of Association (AoA). The AoA must explicitly state that pledged shares are subject to these non-transferability norms. This ensures that the arrangement is legally binding on all shareholders and their lenders.
4. Strategic Implications
A less discussed but vital aspect is found in the Industrial Relations Code, 2020. It mandates that Grievance Redressal Committees (GRC) must have adequate representation of women, proportionate to their number in the workforce.
In dispute resolution, the presence of women on the panel is critical because it ensures that grievances, particularly those regarding harassment or gender-specific discrimination, are heard with necessary sensitivity and perspective.
5. The Informal Sector Gap
This proposal represents a shift from “compliance by force” to “compliance by design.” The implications for various stakeholders are detailed below:
For Pre-IPO Investors (PE/VC Funds, HNIs)
- Liquidity Preservation: Investors no longer need to scramble to repay loans to “free up” shares for the IPO lock-in. They can keep their leverage (loans) active while complying with SEBI norms.
- Exit Certainty: It removes the friction that often complicates the transition from being a private shareholder to a public one.
For Issuers (The Company)
- Faster Listings: The “pledged share” issue is a common reason for delays in filing the Red Herring Prospectus (RHP). By removing this hurdle, companies can stick to tighter IPO timelines.
- Reduced Friction with Investors: Promoters and management no longer need to negotiate with reluctant investors to un-pledge shares. This reduces internal conflict during the critical pre-IPO phase.
For Lenders (Banks/NBFCs)
- Clarified Rights: Previously, the conflict between “pledge” and “lock-in” created legal ambiguity. The new proposal clarifies that lenders retain their security interest (the pledge).
- Restriction on Liquidation: Lenders must be aware that while they can seize the shares upon default, they cannot sell them immediately if the IPO lock-in is still active. This creates a temporary illiquidity risk that lenders will need to factor into their credit risk assessment for pre-IPO financing.
5. Broader Context: Ease of Doing Business
This proposal should be viewed as part of SEBI’s larger 2025 agenda to modernize the IPO process. Alongside this lock-in relaxation, the same consultation paper proposed replacing the bulky “Abridged Prospectus” with a concise “Offer Document” Summary for retail investors.
Together, these moves signal that SEBI is moving toward a regulatory philosophy that prioritizes functional outcomes (e.g., preventing share dumping) over procedural rigidity (e.g., insisting on a specific “lock-in” tag). SEBI is utilizing technology to solve a regulatory deadlock by using the “non-transferable” status as a functional equivalent to “lock-in.”
The SEBI proposal to ease lock-in norms for pledged pre-IPO shares is a welcome technical correction. It does not reduce the duration of the lock-in (which remains 6 months for non-promoters) but significantly eases the manner of compliance.
By allowing pledged shares to be marked “non-transferable,” SEBI is effectively unclogging a major pipeline in the primary market. For investors, it means better capital efficiency; for companies, it means faster IPO execution. The proposal balances the need for market stability (preventing immediate sell-offs) with the commercial reality that investors often leverage their holdings for liquidity.
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Shekhar Mehra is a legal writer and researcher at LEGALLANDS LLP, specializing in corporate law, business structuring, regulatory compliance and post-incorporation governance. He regularly contributes in-depth articles and thought-leadership pieces focusing on entity formation, governance frameworks, cross-border compliance and emerging policy reforms — particularly for India-UAE trade & investment contexts. His work combines technical legal insight with practical business strategy, to guide entrepreneurs, in-house legal teams and advisers through today’s complex regulatory environment.
