Promoter lock-in
Also written Lock-in of promoter shareholding · Lock-in of promoters' contribution
The rule that promoters' shares cannot be sold for a set time after an IPO — 18 months for the minimum 20 percent contribution, or 3 years if most proceeds fund capital expenditure; 6 months or 1 year for the excess.
In plain language
Investors in an IPO are buying into a business on the strength of the people who built it. If those people could sell out the day the shares list, the public would be left holding the company while the promoters walked away with the cash.
SEBI prevents that in two steps. First, promoters must keep a minimum stake after the issue. Second, their shares are locked in — held in the depository with a lock-in marking so they cannot be sold — for a fixed period after allotment.
The workbook lists this among the protections for public investors: the continued participation of the promoters in the business through a lock-in of the promoters' holdings.
How it works
The minimum stake. Promoters of a company making a public issue must continue to hold at least 20 percent of the post-issue paid-up capital. If their post-issue holding is below 20 percent, AIFs, foreign venture capital investors, scheduled commercial banks, public financial institutions or IRDAI-registered insurance companies may contribute to meet the shortfall — subject to a maximum of 10 percent of post-issue capital.
For a further public offer, this is not required where the equity shares have been frequently traded for at least 3 years, the issuer has redressed at least 95 percent of investor complaints, and it has complied with the LODR Regulations for at least 3 years.
The lock-in periods, from the date of IPO allotment.
| Holding | Standard | If the majority of issue proceeds (excluding OFS) go to capital expenditure |
|---|---|---|
| Minimum contribution (including eligible institutional contributions) | 18 months | 3 years |
| Promoter holding in excess of the minimum | 6 months | 1 year |
Capital expenditure includes civil work, miscellaneous fixed assets, purchase of land, building, and plant and machinery.
How it is enforced. After an issue, the RTA instructs the depositories to lock in the pre-offer share capital (except the shares offered in the issue, ESOPs and the like). The beneficial owner download shows shares under lock-in, and certificates carrying a lock-in remark keep the tag in demat form while the lock-in is in force.
Related lock-ins in the workbook. Preferential allotment: promoter group 18 months from trading approval, others 6 months. Anchor investors: 50 percent for 30 days, the balance for 90 days.
A worked example
Illustrative figures. After its IPO a company has 10 crore shares of post-issue paid-up capital. Promoters hold 58 percent = 5.8 crore shares. The prospectus says most of the fresh-issue money will build a new plant — capital expenditure.
Minimum contribution = 20% × 10 crore = 2.0 crore shares → locked for 3 years
Excess promoter stake = 5.8 crore − 2.0 crore = 3.8 crore shares → locked for 1 year
Had the proceeds been for general corporate purposes instead, the same split would be locked for 18 months and 6 months.
A shortfall case. In a different IPO, promoters would hold only 16 percent post-issue. An AIF contributes 4 percent:
Promoters 16% + AIF 4% = 20% minimum contribution
AIF contribution 4% ≤ 10% ceiling ✔
That 20 percent — the AIF's 4 percent included — is locked in for 18 months (or 3 years for a capex-led issue).
When the one-year lock-in on the excess ends, promoters who want to sell can do it through a further public offer by way of offer for sale — one of the reasons the workbook gives for FPOs.
Why NISM asks about it
Chapter 7.3 (Reservations) carries the 20 percent minimum contribution, the 10 percent institutional top-up, the FPO exemption and all four lock-in periods; Chapter 7.2 lists lock-in as an investor protection; Chapter 8 covers preferential lock-in; Chapter 9.3 anchor lock-in; Chapter 10.1 the RTA's instruction to depositories. Expect a period question — 18 months / 3 years / 6 months / 1 year — and a question on who can fill a promoter shortfall.
Common exam traps
- Four periods, two triggers. 18 months and 6 months are standard; 3 years and 1 year apply when the majority of proceeds, excluding the OFS portion, fund capital expenditure.
- The clock runs from the date of IPO allotment, not from listing. The preferential allotment lock-in runs from trading approval instead.
- The minimum is 20 percent of post-issue paid-up capital; institutional contributors can fill a shortfall only up to 10 percent of post-issue capital, and their contribution is locked in too.
- Preferential allotment: 18 months for promoters, 6 months for others — same numbers as the IPO standard periods, different starting point.
- Anchor lock-in is 30 days on half and 90 days on the rest — not 6 months.
- The FPO exemption needs all three conditions: frequently traded for 3 years, 95 percent complaint redressal, and 3 years of LODR compliance.
Where this is taught
Free preparation for NISM Series II-ARelated terms
- Anchor investorA qualified institutional buyer allotted shares a day before a book-built issue opens — at least Rs 10 crore on the main board or Rs 2 crore on the SME exchange — under a discretionary, locked-in allocation.
- Beneficial ownerThe investor who owns dematerialised securities for every practical purpose — the depository is the registered owner on the company's books, but the dividends, bonus, rights and votes are the investor's.
- Preferential issueAn issue of specified securities by a listed issuer to a select person or group on a private placement basis — excluding public, rights, bonus and ESOP issues, QIPs, sweat equity and overseas depository receipts.
- Differential pricingPricing an issue differently for different investor categories — in particular, allotting to retail investors at a discount of not more than 10 percent to the price at which other categories are allotted.
- Red Herring ProspectusThe offer document used in a book-built public issue, containing every disclosure a prospectus carries except the final price or number of shares, filed with the Registrar before the issue opens.
- Merchant bankerA SEBI-registered body corporate engaged in the business of issue management — arranging the selling, buying or subscribing of securities, or acting as manager, consultant or adviser in relation to an issue.
- Stabilizing AgentUnder a green shoe option, the merchant banker who uses over-allotment money to buy the newly listed shares when they fall below the issue price — buying only, for 30 days, up to the over-allotment.
- Preferential allotment lock-inThe mandatory holding period on shares from a preferential allotment by a listed company — 18 months for promoters and the promoter group, 6 months for everyone else, both from the date of trading approval.
- Extinguishment certificateThe certificate confirming that shares bought back by a company have been destroyed and capital reduced — signed by the registrar, secretarial auditor and directors for a tender offer, filed with SEBI.