SEBI’s Lock-in Norms for Pre-IPO Investors
Introduction
The Securities and Exchange Board of India (SEBI) is the premier regulator of India’s capital markets and plays a central role in governing how companies raise capital from public investors via mechanisms such as Initial Public Offerings (IPOs). One of the key components of its regulatory framework is lock-in norms rules that restrict certain shareholders from selling their shares for a specified duration before and after a company lists on a stock exchange.
Lock-in periods are essential to:
- Provide market stability after listing.
- Align interests of long-term and new investors.
- Prevent early sell-offs that can lead to volatility.
- Foster confidence among retail participants, who are typically not subject to lock-in constraints.
Pre-IPO investors (comprising non-promoter investors such as venture capital funds, private equity firms, and other non-promoter holders) are subject to specific lock-in regulations, shaped by SEBI’s Issue of Capital and Disclosure Requirements (ICDR) Regulations, 2018 and subsequent amendments.
This research note explores these norms comprehensively, focusing particularly on recent amendments and proposed changes in 2025, and outlines the procedural framework for adherence and compliance
Background
SEBI’s Lock-in Norms in the IPO Ecosystem
Under the ICDR Regulations, SEBI delineates different lock-in requirements for various shareholder categories in an IPO:
- Lock-in for Promoters: Historically, promoters were required to lock-in their minimum contribution (usually at least 20% of post-issue capital) for three years from allotment. Excess promoter holdings above this minimum were earlier locked in for one year.
- Lock-in for Pre-IPO Investors: Pre-IPO investors defined broadly as persons other than promoters holding pre-issue share capital were required to lock in their entire pre-issue capital for one year from allotment. Certain categories, such as venture capital funds (VCFs), foreign venture capital investors (FVCIs), and specified Alternative Investment Funds (AIFs), had exemptions if they met holding period or registration conditions under separate SEBI regulations[i].
- Purpose of Lock-in Norms: The purpose of lock-in norms is to:
- Prevent immediate liquidation of shares post-IPO, which may flood the market, leading to price instability.
- Ensure promoters and early investors remain committed to the entity and support its long-term growth narrative.
- Guard retail and public investors from sudden sell-offs that can erode valuation and confidence. Lock-in periods are tagged in demat accounts by the depositories, making transfers or sales subject to regulatory restrictions until their expiry[ii].
SEBI’s Lock-in Norms: Current Framework (ICDR Regulations)
1. Code and Regulation Basis
The key provision governing pre-IPO lock-in in the ICDR Regulations is Regulation 17, which mandates that the entire pre-issue capital (other than that held by promoters) must be locked in for six months from the date of allotment in an IPO. Exceptions are available for certain categories under specified conditions[i].
2. Scope of Pre-IPO Lock-in
- Definition: ‘Pre-IPO investors’ include early investors holding unlisted share capital before public issue, including private equity, institutional investors, and other non-promoters.
- Duration: Typically, the lock-in is six months from the allotment date of IPO shares.
- Exemptions: Equity shares held by regulated institutional categories (e.g., certain categories of AIFs, VCFs, FVCIs) may have differentiated treatment, but still generally face six-month restrictions unless exempt per separate rules[ii].
3. Operational Challenges
A practical difficulty has been the inability of depositories to mark pledged shares often held by non-promoter investors as locked in, due to technical system limitations. If shares are pledged to lenders pre-IPO, they remain technically classified as transferable, undermining compliance with lock-in norms at critical timeline stage[iii]. These system issues have led to delays and complexities during the IPO process, prompting SEBI to propose structural changes.
Recent Amendments and Proposed Reforms (2025)
In late 2025, SEBI initiated significant amendments and proposals to address persistent operational bottlenecks and modernize lock-in norms, especially concerning pledged shares held by pre-IPO investors. These reforms form part of a broader consultation to simplify IPO processes and enhance ease of doing business.
1. Proposed ICDR Amendment (Consultation Paper – Nov 2025)
SEBI issued a consultation paper proposing to amend Regulation 17 of the ICDR Regulations to specifically address how pledged shares will be treated for lock-in purposes. The key proposals include:
A. Enable Depository Lock-in for Pledged Shares
- Introduce provisions allowing depositories to treat pledged pre-issue shares as “non-transferable” functionally equivalent to locked in for the applicable lock-in period.
- If the pledge is invoked or released, the lock-in would automatically continue in the account where the shares reside, either with the pledgee or pledgor, for the remaining lock-in period.
- This amendment aims to resolve operational difficulties when shares are pledged to lenders, ensuring lock-in compliance without forcing investors to prematurely release pledges or repay loans[i].
C. Disclosure Enhancements
2. Regulatory Rationale: The reforms seek to
- Eliminate compliance bottlenecks caused by depository system limitations.
- Enable seamless lock-in application even for pledged shares.
- Enhance ease of listing for companies with complex pre-IPO investor cap tables.
- Secure investor interests while balancing market operations[i].
3. Broad Relaxation and Easing Proposals
Alongside the technical fix for pledged shares, SEBI is also exploring broader relaxations in lock-in norms, such as excluding some existing shareholders from lock-in, provided they do not exert significant influence or control, a step aimed at expediting the IPO process[i][ii].Such proposals highlight a regulatory intent to ensure lock-in serves its stabilizing purpose without becoming a procedural obstacle.
Analysis of the 2025 Amendments
Significance of Pledge-Related Changes: The proposed addition to the ICDR Regulations to mark pledged shares as non-transferable is a structural reform with significant market impact
- Operational Efficiency: Issuers and depositories will no longer face last-minute compliance hurdles when large numbers of pre-IPO investors have pledged shares. Instead of requiring pledges to be released or reconstituted, an equivalent lock-in status is imposed administratively[i].
- Investor Flexibility: Pre-IPO investors benefit from not having to unwind financing arrangements simply to comply with lock-in conditions, preserving their financing flexibility while ensuring regulatory adherence[ii].
- Market Stability: Automatic continuation of lock-in after pledge invocation strengthens market stability even if investors face credit events, shares remain restricted[iii].
Policy Balance: The reforms aim to balance investor protection with practical execution. While lock-in protects the market from sudden sell-offs, stringent application without operational consideration can slow IPO timelines or increase costs. These amendments seek to mitigate such friction without diluting regulatory intent.
[i] Supra Note 6
[ii] Supra Note 9
[iii] Supra Note 6
Procedural Aspects: Compliance and Implementation
Before IPO Filing
- Amend Articles of Association:
- Amend the AoA to incorporate provisions recognizing pledged shares as non-transferable during lock-in.
- Communicate these changes to lenders/pledgees[1].
- Board Approval:
- Convene a board meeting to approve regulatory compliance, including draft amendments to AoA and lock-in terms.
- Draft Offer Documentation:
- Include clear disclosure on lock-in provisions, treatment of pledged shares, and timeline for release.
At IPO Filing and Allotment
- Depository Instructions:
- Provide instructions to depositories upon filing DRHP/RHP to treat applicable pre-IPO shares (including pledged ones) as non-transferable.
- Ensure categorization and tagging is reflected correctly in depositories systems before listing[2].
- Public Disclosures:
- Offer documents must transparently outline all lock-in terms, including treatment of pledged shares and conditions for release.
- Coordination with Lenders:
- Communicate with pledgees regarding lock-in tagging and compliance process to avoid conflicts with existing security arrangements[3][4].
- Regulatory Certification:
- Merchant bankers/lead managers must certify compliance with updated lock-in norms as part of the IPO filing process.
Post-Listing Monitoring
- Monitoring Lock-in Expiry: Depositories track the expiry of lock-in periods and ensure that shares become transferable only on eligible expiry.
- Compliance Reporting: Companies must report lock-in compliance periodically to SEBI and stock exchanges until the entire post-issue period elapses.
Practical Implications and Market Impact
For Issuers and IPO Process
- Smoother IPO Timeline: Amended norms reduce last-minute hurdles related to locked-in pledged shares.
- Reduced Pre-Listing Work: Companies and merchant bankers spend less effort untangling shareholder pledges prior to listing.
For Pre-IPO Investors
- Retains Financial Flexibility: Investors can maintain funding arrangements without unlocking share pledges prematurely.
- Greater Transparency: Mandatory disclosure in offer documents helps investors make informed decisions about timing and lock-in exposure.
Market Stability and Retail Investor Confidence
- By ensuring lock-in norms remain effective even when shares are pledged, SEBI reinforces the integrity of listing stability mechanisms,
- protecting market confidence and potentially reducing volatile sell-offs in the post-IPO period.
SEBI’s lock-in norms have long been a fundamental component of India’s IPO regime, designed to strike a balance between market stability and investor protection. The recent regulatory focus on operational bottlenecks especially relating to pledged pre-IPO shares marks an evolution in policy thinking, prioritizing ease of compliance and continuity of market operations.
The proposed ICDR amendments and related procedural enhancements are aimed at resolving systemic hurdles in the application of lock-in periods, ensuring that the spirit of the rule preventing premature share sales is upheld without creating logistical barriers for issuers or investors. As these changes move from consultation to final regulation, stakeholders from corporate and merchant bankers to depositories and pre-IPO investors will need to integrate these norms into their IPO preparation workflows.
Overall, SEBI’s evolving lock-in framework underscores its broader agenda, modernizing India’s capital markets through pragmatic regulation that protects investors while facilitating market growth and efficiency.
[1] Supra Note 3
[2]Supra Note 6
[3] Supra Note 3
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Hritvik Gupta is a legal writer and researcher associated with LEGALLANDS LLP, where he contributes analytical and research-driven articles on corporate governance, international trade laws, and policy reforms. His writing reflects a deep understanding of evolving legal frameworks and their impact on cross-border commerce and regulatory compliance.
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